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RUSSIAN MONEY LAUNDERING 



Y 4.B 22/1:106-38 



Russian Honey Laundering, Serial No. 106-38, Septe 

21, 22, 1999 ( 106-1 Hearina) rm^ir^ 

BEFORE THE 





COMMITTEE ON BANKING AND 
FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED SIXTH CONGRESS 

FIRST SESSION 



SEPTEMBER 21, 22, 1999 



Printed for the use of the Committee on Banking and Financial Services 



Serial No. 106-38 




SUPERINTbl\IUENT OF DOCUMENTS' 
DEPOSITORY 



APR 2 6 2000 



I 



BOSTON PUBLIC LIBRARY 
GOVERNMENT DOCUMEMTS DEPARTMENT 



RUSSIAN MONEY LAUNDERING 



HEARINGS 

BEFORE THE 

COMMITTEE ON BANKING AND 
FINANCIAL SERVICES 

U.S. HOUSE OP REPRESENTATIVES 

ONE HUNDRED SKTH CONGRESS 

FIRST SESSION 



SEPTEMBER 21, 22, 1999 



Printed for the use of the Committee on Banking and Financial Services 

Serial No. 106-38 




U.S. GOVERNMENT PRINTING OFFICE 
59-889 CC WASHINGTON : 2000 



For sale by the U.S. Government Printing Ot'tlce 

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ISBN 0-16-060253-X 



HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES 



JAMES A. LEACH, Iowa, Chairman 
BILL McCOLLUM, Florida, Vice Chairman 



MARGE ROUKEMA, New Jersey 

DOUG K. BEREUTER, Nebraska 

RICHARD H. BAKER, Louisiana 

RICK LAZIO, New York 

SPENCER BACHUS III, Alabama 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

TOM CAMPBELL, California 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

JACK METCALF, Washington 

ROBERT W. NEY, Ohio 

BOB BARR, Georgia 

SUE W. KELLY, New York 

RON PAUL, Texas 

DAVE WELDON, Florida 

JIM RYUN, Kansas 

MERRILL COOK, Utah 

BOB RILEY, Alabama 

RICK HILL, Montana 

STEVEN C. LaTOURETTE, Ohio 

DONALD A. MANZULLO, IlUnois 

WALTER B. JONES Jr., North CaroUna 

PAUL RYAN, Wisconsin 

DOUG OSE, CaUfomia 

JOHN E. SWEENEY, New York 

JUDY BIGGERT, IlUnois 

LEE TERRY, Nebraska 

MARK GREEN, Wisconsin 

PATRICK J. TOOMEY. Pennsylvania 



JOHN J. LaFALCE, New York 
BRUCE F. VENTO, Minnesota 
BARNEY FRANK, Massachusetts 
PAUL E. KANJORSKI, Pennsylvania 
MAXINE WATERS, California 
CAROLYN B. MALONEY, New York 
LUIS V. GUTIERREZ, Illinois 
NYDIA M. VELAZQUEZ, New York 
KEN BENTSEN, Texas 
JAMES H. MALONEY, Connecticut 
DARLENE HOOLEY, Oregon 
JULIA M. CARSON, Indiana 
ROBERT A. WEYGAND, Rhode Island 
BRAD SHERMAN, California 
MAX SANDLIN, Texas 
GREGORY W. MEEKS, New York 
BARBARA LEE, California 
VIRGIL H. GOODE Jr., Virginia 
FRANK R. MASCARA, Pennsylvania 
JAY INSLEE, Washington 
JANICE D. SCHAKOWSKY, Illinois 
DENNIS MOORE, Kansas 
CHARLES A. GONZALEZ, Texas 
STEPHANIE TUBBS JONES, Ohio 
MICHAEL E. CAPUANO. Massachusetts 
MICHAEL P. FORBES, New York 

BERNARD SANDERS, Vermont 



(II) 



CONTENTS 



Page 

Hearing held on: 

September 21, 1999 1 

September 22, 1999 109 

Appendix: 

September 21, 1999 195 

September 22, 1999 346 

WITNESSES 

Tuesday, September 21, 1999 

Brovkin, Vladimir, Professor, American University Transnational Crime and 

Corruption Center, accompanied by Prof. Louise Shelley 54 

deBorchgrave, Amaud, Director, The Global Organized Crime Project, Center 

for Strategic and International Studies 88 

Ermarth, Fritz W., former CIA Chief Russian Analyst, National Security 

Council Official 48 

Palmer, Richard L., President, Cachet International, Inc., former CIA Station 

Chief 92 

Saunders, Paul J., Director, The Nixon Center 52 

Shvets, Yuri, Consultant, former KGB agent 81 

Summers, Hon. Lawrence H., Secretary, Department of the Treasury 14 

Williamson, Anne, Author 84 

Woolsey, Hon. R. James, Shea & Gardner, former Director, Central 

Intelligence Agency 45 

APPENDIX 

Prepared statements: 

Leach, Hon. James A 196 

Biggert, Hon. Judy 216 

LaFalce, Hon. John J 217 

Maloney, Hon. Carolyn B 226 

Royce, Hon. Edward R 227 

Velazquez, Hon. Nydia M 229 

Waters, Hon. Maxine 232 

Brovkin, Prof Vladimir, Prof. Keith Henderson and Prof Louise Shelley, 

joint statement 255 

deBorchgrave, Amaud (with attachments) 292 

Ermarth, Fritz W 249 

Palmer, Richard L. (with attachments) 306 

Shvets, Yuri 263 

Simes, Dimitri K., and Saunders, Paul J., joint statement 251 

Summers, Hon. Lawrence H 234 

Williamson, Anne 275 

Woolsey, Hon. R. James 246 



(III) 



Page 

Additional Material Submitted for the Record 

Leach, Hon. James A.: 

Letter from Yu Shuratov, Prosecutor General, Russian Federation, Sept. 

19, 1999 215 

LaFalce, Hon. John J.: 

Opening statements before the Committee on Small Business, April 14, 

1994, and May 12, 1994 220 

Shelley, Prof. Louise: 

Written response to questions from Hon. John J. LaFalce 261 

del Ponte, Carla, Attorney General, Swiss Confederation, prepared statement 202 
Embassy of the Republic of Cyprus, prepared statement 341 



WITNESSES 

Wednesday, September 22, 1999 

Renyi, Thomas A., Chairman of the Board and CEO, The Bank of New 

York Company, Inc 152 

Robinson, Hon. James K, Assistant Attorney General, Criminal Division, 

Department of Justice 116 

Shchekochikhin, Yuri, Member of the Russian Ehima, editor of Moscow news- 
paper Novaya Gazeta 143 

Vitale, Anne T., Managing Director and Deputy General Counsel, Republic 
Bank of New York 179 

von Gerhke-Thompson, Karon, Vice President, First Columbia Company, Inc. 189 

APPENDIX 

Prepared statements: 

Leach, Hon. James A 347 

Bachus, Hon. Spencer 348 

Paul, Hon. Ron 350 

Roukema, Hon. Marge 356 

Waters, Hon. Maxine 357 

Renyi, Thomas A 381 

Robinson, Hon. James K 359 

Vitale, Anne T. (with attachments) 405 

von Gerhke-Thompson, Karon 451 

Additional Materl\l Submitted for the Record 

Paul, Hon. Ron: 

"Get Rid of the IMF" Investor's Business Daily Sept. 1, 1999 352 

"Skuratov Says IMF Billions Sold on the Si/ St. Petersburg Times, 
Sept. 17, 1999 353 

Renyi, Thomas A.: 

Written reply to questions from Hon. Edward Royce 391 



(IV) 



RUSSIAN MONEY LAUNDERING 



TUESDAY, SEPTEMBER 21, 1999 

U.S. House of Representatives, 
Committee on Banking and Financial Services, 

Washington, DC. 

The committee met, pursuant to call, at 10:05 a.m., in room 
2128, Rayburn House Office Building, Hon. James A. Leach, 
[chairman of the committee], presiding. 

Present: Chairman Leach; Representatives Roukema, Bereuter, 
Lazio, Bachus, Royce, D. Weldon of Florida, Ryan, Biggert, Terry, 
LaFalce, Vento, Frank, Waters, Velazquez, Bentsen, Sandlin, 
Inslee, Moore, Jones, and C. Weldon of Pennsylvania. 

Chairman Leach. The hearing will come to order. 

The committee meets today for its fifth hearing on international 
financial issues this year and the third on Russia and corruption 
over the last twelve months. The hearings today and tomorrow will 
be followed this fall by others dealing specifically with Western fi- 
nancial assistance strategy, including the International Monetary 
Fund, regulatory issues attendant to preventing financial crimes, 
the depth of the crime and corruption problem in Russia, Russian 
use of offshore financial institutions and the intertwining of those 
institutions with the United States and other Western banks, the 
role of public and private United States advisers in Russia's transi- 
tion to free markets, the role of the U.S. intelligence community in 
monitoring Russia's Central Bank and other monetary and banking 
matters, as well as other concerns. 

Today, we will begin with an examination of recent allegations 
that corrupt Russian groups and individuals have infiltrated West- 
ern financial institutions. In this regard, we invited several wit- 
nesses who, according to various reports, have material knowledge 
of these matters, but who have declined to appear voluntarily be- 
fore the committee, including Natasha Kagalovsky, former head of 
the Eastern European Division, Bank of New York; Lucy Edwards, 
formerly with the London office of the Bank of New York; Bruce 
Rappaport, Chairman and CEO of the Bank of New York Inter- 
Maritime; Mikhail Khodorkovsky, Russian oil industry executive; 
as well as the chairmen of several Western money center banks. 

As the hearing process continues, it will be my intention to seek 
witness subpoenas where appropriate. We also invited Carla del 
Ponte, the former Chief Swiss Prosecutor. She could not come, be- 
cause she took up new functions at The Hague yesterday, but she 
sent a statement outlining a new aggressive Swiss policy toward 
the scourge of money laundering which involves a hard look at 

(1) 



Russian corruption. I invite the committee's attention to her state- 
ment and would ask unanimous consent it be placed in the record. 

[The prepared statement of Carla del Ponte can be found on page 
202 in the appendix.] 

I also invite the committee's attention to a letter from the Honor- 
able Yuri Skuratov, the Prosecutor General of Russia, who also was 
invited to testify. Mr. Skuratov notes that he is "unfortunately" un- 
able to come this week, but observed that he is "deeply convinced 
that the forthcoming hearings will allow him to develop valuable 
recommendations to the financial and law enforcement structure of 
Russia and the United States of America in counteracting infiltra- 
tion of dirty money into our financial systems." 

Mr. Skuratov has offered his personal cooperation with the com- 
mittee's work. Significantly, two days after receiving the commit- 
tee's invitation to testify, his apartment in Moscow was ransacked. 

It is my intention that the first of our subsequent committee 
hearings on Russia will focus on Western assistance strategy for 
Russia and the possible diversion or misappropriation of those 
funds. Last month, Mr. LaFalce and I commissioned a GAO study 
to examine the effectiveness of the $90 billion in Western assist- 
ance for Russia, particularly in light of problems of corruption and 
the power of the so-called "oligarchs." But recent developments 
warrant an additional in-depth investigation of allegations of diver- 
sion or misuse of Western assistance. 

In this context, I would advise in the strongest possible terms 
that the Department of thb Treasury insist on a full and complete 
audit of the relationship between the ^ Central Bank of Russia and 
the IMF, particularly the activities of the CBR in the foreign ex- 
change and treasury markets in the period of July to August 1998. 
Failure to do so would undercut any remaining credibility of inter- 
national financial institutions dealing with Russia. Likewise, I will 
request this week a full GAO audit of U.S. bilateral assistance to 
Russia, as well as a review of multilateral assistance efforts. 

The global payment system is opaque and anonjonous by design, 
and has been made more so by the technological advances of the 
past decade. The same technology that has produced such great 
benefits for the financial services industry and the world economy 
as a whole has also made it enormously difficult to trace the pro- 
ceeds of illegal activity once a criminal succeeds in gaining entry 
to the payment system. In an era where funds can be transferred 
among multiple accounts on multiple continents in the blink of an 
eye, the challenges faced by law enforcement agencies, regulators 
and financial institutions in trying to track dirty money through 
the system are enormous. 

In this regard, one of the issues brought forth by recent reports 
of large money flows of questionable origin through Western finan- 
cial institutions is the legal obligation of U.S. banks to report such 
activity to appropriate authorities. Under current law, depository 
institutions are required to file so-called "Suspicious Activity Re- 
ports," or SARs, with the Treasury Department whenever they be- 
come aware of suspicious account activity or possible violations of 
law. According to press reports, it was the filing of a SAR by one 
of the banks that will be represented at this hearing. Republic Na- 
tional Bank of New York, that helped alert law enforcement au- 



thorities to the massive funds flow from Russia into other New 
York money center banks. 

Let me just conclude by stressing that this is a hearing designed 
to help Russia and the Russian people. It is not a hearing designed 
to embarrass anyone. We want to look to Russia as a country with 
a great future, not as a country that appears to be imploding from 
within, and for this reason, I would like to take a moment to speak 
directly to the Russian people. 

[Statement from Chairman Leach in Russian.] 

At this point, I would like to introduce a group of Russian parlia- 
mentarians who are visiting us this morning. I would like them to 
stand. 

You are very welcome. Thank you. 

[The prepared statement of Hon. James Leach can be found on 
page 196 in the appendix.] 

Chairman Leach. JMr. LaFalce. 

]VIr. LaFalce. IMr. Chairman, I don't know whether to say that 
I agree or disagree with those latest remarks of yours, but I am 
sure that I agree in large part. 

JMr. Frank. Would the gentleman yield? 

I would like to just say that some of us are glad now that we 
didn't vote for the English-only bill, because it would have gotten 
the Chairman in trouble. 

]V[r. LaFalce. IMr. Chairman, thank you very much for holding 
these extremely important hearings. We have all become aware of 
the recent press reports revealing major problems in the areas of 
money laundering, diversion of funds, the crime and corruption in 
Russia that appear to have reached into the United States banking 
system. The situation has called into question the efficacy of our 
money laundering statutes and the monitoring capabilities of our 
international financial institutions. 

I have long been concerned with the serious allegations of crime 
and corruption in Russia and the alleged infiltration of the coun- 
try's government institutions by organized crime. Indeed, as Chair- 
man of the Small Business Committee, I held hearings on this 
issue the last year I was Chairman, April 14, 1994, and then on 
]VIay 12, 1994, where I had the pleasure of having the then-Assist- 
ant Secretary of the Treasury for International Policy and Finan- 
cial Institutions, Dr. Summers, and we discussed this issue at con- 
siderable length at that time. 

With your permission, ]VIr. Chairman, I would like to put into the 
record the opening statements that I gave at those two hearings in 
April and IMay of 1994. 

Chairman Leach. Without objection. 

IVIr. LaFalce. While we are not in any position to dictate how a 
country should run its internal affairs, we are fully entitled to an 
accounting of whether the funds provided by international financial 
institutions are to be used for their intended purposes. These funds 
involve significant United States taxpayer resources, and it is our 
duty to ensure that they are not misused. 

At the same time, our National Security Adviser and the stability 
of the world's financial system demand our continued constructive 
involvement with Russia. As a democracy experiencing growing 
pains and still purging itself of the political and economic ghosts 



of its Soviet past, Russia continues to need our help. Isolating Rus- 
sia and isolating ourselves from Russia would not be the solution. 
It would be counterproductive. 

And so I see little to gain in the simplistic options some have 
suggested of abandoning as substantial and as troubled an econ- 
omy as Russia's. I recognize there are challenges to continued en- 
gagement, and the memorable words of Sir Winston Churchill more 
than a half a century ago still ring true. "I cannot forecast to you 
the actions of Russia; it is a riddle wrapped in a mystery inside an 
enigma." 

However, as painful and frustrating as the process might be, I 
know that the ultimate payoffs of our continued engagement with 
Russia are far, far greater than the risks. But it is time to ask 
some tough questions and to get answers that we need to make our 
policy of engagement work much better. We should continue to en- 
courage economic and political reform in Russia, but we should also 
impose tough conditions on the assistance we give and find better 
mechanisms, if at all possible, for monitoring that compliance, and 
unless we can obtain the necessary cooperation from Russia to 
make that possible, our long-term involvement would be put at 
risk. 

I think there is one area of our policy that deserves particular 
scrutiny and hopefully will teach us some important lessons. I per- 
sonally believe that a major part of what went wrong in Russia was 
the manner of the privatization program in Russia. This is not a 
new refrain for me. I had hearings on the privatization program. 
I have discussed this at length; I wrote to the President on this, 
and so forth. 

Privatization can be very important, and it can first help achieve 
greater equity and new opportunity in the distribution of a society's 
wealth and assets; and second, can restructure key resources such 
as utilities, transportation, banks and trade companies to permit 
them to respond to market forces rather than government dictates. 
It can build up a small business and medium-size business class 
that can build up a middle-income structure within a country, that 
is, if it is done right. 

But there is another approach to privatization, what I refer to in 
my letters to the President and in my hearings in 1994 as Mexican 
"patron" privatization and Russian "nomenklatura" privatization, 
and that, in considerable part, is unfortunately the road that Rus- 
sia took. Russian privatization has most often come to mean the 
wholesale transfer of valuable state assets to a small group of ty- 
coons who are more interested in taking value out of the country 
than investing in it. This type of privatization concentrates wealth 
and puts an economy at risk. 

Dr. Summers, who testified on this before my Small Business 
Committee in 1994, I would appreciate at some point in your pres- 
entation today your analysis of what went wrong, what went right, 
what we can learn about managing such situations in the future 
and dealing with such situations. 

Let me now turn to the specific issue of money laundering. Of 
the many public policy challenges facing lawmakers, the law en- 
forcement community and regulators today, none may represent as 
significant a threat to our financial system as money laundering 



does. You want to get at the root of crime, follow the money, follow 
the money, follow the money. 

And the wholesale "cleansing" of illegitimate profits derived from 
criminal activities reaches staggering proportions, by some esti- 
mates, between $100 and $300 billion in the United States alone 
and perhaps one-half trillion worldwide. By comparison, this figure 
dwarfs the GDP of many, many nations. 

Press reports have now alleged that up to $10 billion of possible 
illicit Russian money passed through one bank. That may or may 
not be accurate. That may or may not involve appropriate account- 
ing — double, triple accounting. It remains to be seen. The facts of 
the case are very sketchy. The criminal authorities are investigat- 
ing. It would be most premature for us to pass judgment on any 
aspect of this case without a full accounting of the facts, and since 
there is a criminal investigation taking place, it might be some 
time before we have that. 

Our Banking Committee did take a good look at money launder- 
ing in 1994 when we passed the Money Laundering Suppression 
Act. Up until recently, the emphasis on financial institutions' com- 
pliance with cumbersome paperwork requirements worked against 
the effective enforcement of money laundering laws. The 1994 Act 
made the reporting requirements part of the Bank Secrecy Act 
more meaningful and more useful to law enforcement. 

But even with these targeted changes, we still learn of egregious 
cases that our regulatory system is supposed to catch, but misses. 
And often they occur in vulnerable emerging democracies like Mex- 
ico and Russia, places where the rule of law is still, unfortunately, 
not fully consolidated; and when the big cases strike, we begin to 
wonder whether the regulatory system, our first line of defense, 
truly works. 

I do believe, Mr. Chairman, that it would have been productive 
for us to examine regulatory issues in this hearing, which are ripe 
for revisiting, and I hope that in the very near future the bank reg- 
ulators, who are not going to be here either today or tomorrow, will 
come before our committee to explain to us what may or may not 
be wrong with our current regulatory system. I would like to hear, 
for example, from the Federal Reserve, the regulator with respect 
to one bank that received a tremendous amount of publicity, the 
Bank of New York, for example. 

With that, I thank the Chair very much. 

Chairman Leach. Well, thank you, John, and let me say that 
will be the subject of future hearings, which I outlined at the be- 
ginning of my statement. 

Does anyone else have an opening statement? 

Mr. Bereuter. 

Mr. Bereuter. Thank you, Mr. Chairman. While I certainly do 
commend you for the obvious need to have the hearings on Russian 
money laundering, I appreciate the fact that you and Ranking 
Member LaFalce have apparently solicited the assistance of the 
General Accounting Office. Like the Banking and Financial Serv- 
ices Committee, we share a role in reviewing these issues with the 
International Relations Committee. I think that the bilateral as- 
sistance programs of the United States also need to be examined. 



While this hearing is on Russian money laundering, the Treasury 
Department, of course, has the major role for our Government's 
participation in making decisions on multilateral development 
banks. One of the most important, obviously, is the International 
Monetary Fund. I served as the Ranking Member for many years 
on the subcommittee responsible for oversight of the multilateral 
development banks, including the IMF, and I would urge the 
Chairman and Subcommittee Chairman Bachus that this is an ap- 
propriate time to examine the performance of the International 
Monetary Fund. 

In my history here I have never failed to support authorizations 
and appropriations for the International Monetary Fund, but in 
light of what has happened, I do believe that it is time to hold in 
abeyance any further assistance from the International Monetary 
Fund to Russia. I also think I would have to cast a vote of no con- 
fidence on the International Monetary Fund in their activities. 

It is clear to me that they gave bad advice to Korea and Thailand 
in the early stages of their financial problems, and thus they com- 
plicated the situation in those countries. It is clear to me that bilat- 
eral and multilateral funds were used to shore up the election op- 
portunities of President Yeltsin to the disadvantage of the Russian 
people. 

I believe that we certainly need to continue bilateral assistance 
programs for rule of law, for democracy building, and for Nunn- 
Lugar, working with a variety of governors and local officials that 
have managed to escape the ravages of corruption in that country. 

All you have to do today is to go to Cyprus to see the impact of 
money laundering on its economy. It has become a center of money 
laundering for money coming out of the former Soviet Union, in- 
cluding Russia. Distinguished former members of Democrat and 
Republican Administrations in the past have told us here on Cap- 
itol Hill in the last several months that they estimate at least 30 
percent of the financial assistance going to Russia has been out- 
right stolen — not just misused, but outright stolen — and unlike the 
money stolen by the robber barons of the previous century in the 
United States, that money was not reinvested in Russia. We are 
looking at one track of money laundering activities these new bar- 
ons moved out of Russia today. 

I do believe it is appropriate for us to examine the IMF and its 
role, and certainly to examine the bilateral assistance programs of 
the United States aimed at the central government of Russia today. 
For the past two years, Russian economists have been telling those 
of us involved in the Aspen Institute study seminars for some fif- 
teen years, that financial assistance to the Russian central govern- 
ment has, in fact, been counterproductive. I urge my colleagues to 
think beyond money laundering, where we will focus today, on how 
the funds of the International Monetary Fund may have been used 
by false accounting, by false reports, by failed promises on the part 
of the Russian central government. 

Thank you, Mr. Chairman. 

Mr. Frank. Mr. Chairman. 

Chairman Leach. Mr. Frank. 

Mr. Frank. Thank you, Mr. Chairman. There are two levels at 
which we have to proceed. One is the very specific inquiry into 



what was obviously serious wrongdoing on the part of people with- 
in the Russian government and the failure of some oversight mech- 
anisms, and I think that is very important that we do that; but 
there is a second level, and I think it is important that we balance 
them. 

The second level is recognition that we are dealing with a major 
nuclear armed power and the fact is that there is a tendency, I be- 
lieve, not just here, but elsewhere, for Americans to exaggerate the 
extent to which we here in Washington can solve all the problems 
in the world. We confronted a situation in post-Communist Russia 
of grave danger and uncertainty. Indeed, we all do tend to focus on 
worst cases, and clearly the degree of theft and the consequent de- 
nial of resources to the Russian people is outrageous and should be 
focused on. 

What we ought also to remember, I remember some of the pre- 
dictions that there would be mass starvation, that democracy 
would fall, that forces of the old Communist regime would take 
over, that a new kind of fascism would take over. There was also 
a more serious threat of nuclear proliferation. The second most 
heavily armed nuclear power in the history of the world was in this 
terrible state, and I say that, because when we come to the ques- 
tion of better oversight and better mechanisms, I think we should 
be very stringent. 

When it comes to the question of American policy in general, I 
will be particularly interested to hear people tell me what the al- 
ternatives were. Obviously, we faced a very difficult situation — the 
world's other superpower, adjusting to not being a superpower, but 
still being superpowerful in terms of its nuclear weapons; a nation 
which had no tradition of democracy entering democracy; a nation 
that had no tradition of a market economy being led to a market 
economy — and I don't doubt we should have done better. But there 
has to be a consideration of what our alternatives were. There has 
to be a consideration of what else we should have done. 

I also think we are going to greet our old friend hindsight here 
today. Maybe I was absent that day, but I don't remember the day 
a motion was made on the floor of the House to cut off all aid to 
Russia. I might have been there; I don't remember it. I know many 
of us gritted our teeth and regretted some of the things that were 
happening, but the notion of — I guess there were two other alter- 
natives to what we did in the grand scheme. One was to threaten 
the Russians with a cutoff and hope that that would produce better 
results. The other would have been to cut them off. 

I would like to hear all of those alternatives considered, because 
we have both technical and specific function of oversight of the 
IMF, but we are also Members of the Congress of the United 
States, talking about the broadest, most important strategic foreign 
policy questions we have. And I fear that there will be a temptation 
to offer no alternatives and simply to be critical of what has hap- 
pened. 

And, yes, we need to look at how we get better from here, but 
the notion that there was some clear-cut and obvious alternative to 
what we did, other than trying harder to be clear. 

And with regard to the Yeltsin election, obviously I don't think 
people should be improperly influencing elections, but I have got to 



8 

be honest with you, as I looked at that cast of characters that were 
running in Russia, I was rooting hard for Yeltsin. Things, as they 
said, have gotten a little bit better. I am under no temptation to 
return to the land of my grandparents. I have talked to my Aunt 
Frannie. She is happy she is still here and not back in Minsk or 
in Moscow. 

So I am not suggesting everything is wonderful. I am suggesting 
that this policy has not been an unmitigated disaster, that there 
has, in fact, been a forestalling of much of the most negative sug- 
gestions about what might happen in Russia, and that the perspec- 
tive we should take is that in a situation of great difficulty with 
very serious constraints on what we could do both bilaterally and 
through the IMF, let us look at how we could have done what we 
did better. And if someone has some grand alternative that they 
were advocating at the time and we didn't follow, I will be glad to 
hear about it. 

Chairman Leach. Thank you, Mr. Frank. 

Mr. Bachus. 

Mr. Bachus. Thank you. Welcome, Secretary Summers. 

I would submit to my colleagues on the Banking Committee and 
to you that what Russia needs is a Moses, and I will say that 
again. What Russia needs is a Moses. They are coming from com- 
munism to democracy. They need leadership. They need a leader. 

If you look at India, you had Gandhi. If you look at Czecho- 
slovakia, which is a wonderful example of a country that in 1989 
had Havel step forward. You have got Walesa in Poland; even some 
might say. Nelson Mandela. But what Russia needs is a leader. 

I think a lot of us thought that Yeltsin was that leader and 
maybe it is the obstacles he has faced, but until we have that 
strong leadership in Russia, what we have seen is predictable. We 
have been having hearings for three years. We have heard about 
the mafia. We have heard about the oligarchs. We have heard 
about money laundering. We have heard about generals selling 
weapons, lack of effective government. 

There is a lot of consternation. There is a lot of concern. There 
is a lot of the wringing of the hands here. There is a lot of ques- 
tioning, a lot of groping for answers and solutions, what I would 
call "chasing of rabbits," because there is just so much we can do, 
what Mr. Frank said. If there is not strong leadership in Russia, 
our options are limited. 

We met in June and we talked about Russia and the economic 
situation there, and I said at that time what Russia needed was 
time, and that is when I first compared their situation to the chil- 
dren of Israel wandering in the desert for forty years, trjdng to get 
ready to govern themselves; and saying that — and I introduced at 
that time a junior high schoolgirl's dissertation in Russia where 
she compared the Russian people to the children of Israel and the 
fact that they needed time. And she said that "they had forty years, 
and we may need forty years." 

They need time, but they also need strong leadership. There was 
an article recently that said, "Who Lost Russia?" and I think that 
was inappropriate. But I do think it is appropriate for us to ask 
about who is leading Russia, who are we dealing with, who is call- 
ing the shots behind the scene and the IMF. If we continue to 



pump money into this country and the leadership is not there, we 
are going to continue to lose. So I would simply say that I am not 
sure we can have an accounting or an explanation from Russia. 

How valid is it going to be? Can we rely on it? They have been 
giving us explanations. They have been accounting for what they 
have been doing, and we found out that a lot of it wasn't true. I 
would say this. I think what we need to do at this time is to focus 
on their leadership and not intervene, but until there is leadership 
in place in Russia, I am not sure what we can do. 

So that would be at least another angle. 

Chairman Leach. Thank you. Does anyone else wish to make a 
statement? 

Ms. Velazquez. 

Ms. Velazquez. I ask unanimous consent to enter my entire 
statement into the record. 

Chairman Leach. Without objection, so ordered. 

Ms. Velazquez. I would like to applaud you for holding this 
hearing in such a timely manner. While it is important that we ex- 
plore the effect of Russian organized crime and money laundering, 
I would like to take this time to stress another aspect of the money 
laundering equation that seems to have been lost in this discussion 
so far, money laundering's close relationship to drug dealers. 

In the United States alone, estimates put the amount of drug 
profits moving through our financial system as high as $100 billion. 
Money laundering provides the life of the drug trade, allowing deal- 
ers and other criminals to thrive and have devastating social and 
economic consequences in our communities. That is why some of 
my colleagues on this committee, including Chairman Leach, Rank- 
ing Member LaFalce, Representatives Roukema, Bachus and King, 
joined with me in passing the Money Laundering and Financial 
Strategy Act which was signed into law last year. 

This Act takes three important steps in combining money laun- 
dering. First, it authorizes funding to help State and local officials 
combat money laundering. Second, it establishes high-intensity fi- 
nancial crime areas which will help concentrate the law enforce- 
ment resources in the areas where they are most needed. Finally, 
the Act mandates the Treasury Secretary to develop the first com- 
prehensive national strategy to combat money laundering. 

All three of these initiatives are important in our fight against 
money laundering, but from a Federal standpoint the most impor- 
tant initiative is the strategy. Tracking down these criminals is all 
about following the money. The money laundering strategy, for the 
first time, provides law enforcement officials a road map to follow 
the money. 

The money laundering strategy was due in February of this year. 
Although it took a while to complete, we have a good basis to con- 
tinue our fight against money laundering, and I want to commend 
Secretary Summers for completing the first comprehensive anti- 
money laundering strategy in our Nation's history. The Treasury 
Department was ready to deliver the strategy to Congress at the 
end of last week, but I asked that it be postponed, because Mem- 
bers were out of town as a result of Hurricane Floyd. It is my un- 
derstanding that the strategy will be unveiled later this week. 



10 

Since becoming Treasury Secretary, Mr. Summers has shown 
that this strategy is a priority for his administration. I thank him, 
as well as Deputy Secretary Eizenstat, Under Secretary Jim John- 
son, Deputy Assistant Secretary Medina and Chief Counsel Ste- 
phen McHale. For those who have questioned our need for a na- 
tional money laundering strategy, the developments of the Bank of 
New York case demonstrate the critical need. 

One of the weaknesses in the current system is the lack of co- 
operation between financial institutions and law enforcement offi- 
cials. In the case before us today, the Bank of New York did not 
file a suspicious activity report until after the Justice Department 
had subpoenaed account records. Had there been better cooperation 
between bank officials and Federal law enforcement, steps could 
have been taken sooner. In order for money laundering detection 
to work in the United States, there must be cooperation between 
banks and law enforcement officials. 

In most money laundering cases, the banks are in the best posi- 
tion to know if illegal activities are taking place. The anti-money 
laundering strategy addresses these issues and lists among its pri- 
orities enhancing the regulatory and combative efforts between fi- 
nancial institutions and law enforcement officials. 

The most important aspect of this strategy may simply be that 
it is the first comprehensive national strategy. It puts in writing 
the goal for our fight against money laundering and how the var- 
ious Federal agencies charged with fighting money laundering 
should work together. The strategy is a blueprint for building a co- 
herent and effective anti-money laundering force, something clearly 
lacking now. 

Thank you again, Mr. Chairman, for holding this important hear- 
ing, and I look forward to hearing from our witnesses. 

Chairman Leach. Thank you. 

Mr. ROYCE. Mr. Chairman. 

Chairman Leach. One second. The Chair would like to suggest 
that if we can we hold opening statements to be as brief as pos- 
sible — and let me say that we have a long day of hearings; and I 
recognize, as Chair, I started out with a long statement, but I am 
going to ask two minutes only, please. 

The gentleman from California. 

Mr. Royce. I will be brief, Mr. Chairman. Thank you. 

What we are examining today is a very serious issue, one that 
goes to the heart of U.S. -Russia relations, and it is worth noting, 
I think, that Russian corruption and the Administration's response 
to that challenge is not a new issue. 

Three years ago this committee held a hearing on organized 
crime in Russia and the threat to international banking systems. 
We heard from representatives of the FBI, the financial crimes en- 
forcement network, the Department of Justice, and we heard from 
recognized authorities on Russia; and during that hearing, I 
brought up questions of extreme capital flight and, most impor- 
tantly, of accountability with respect to International Monetary 
Fund loans. Specifically, I raised concerns about the lack of money 
laundering laws in Russia and our own inability to impose stand- 
ards on foreign banking institutions, and I questioned what guar- 
antees we had that billions of dollars in IMF and international 



11 

loans to Russia reached their intended recipients and were not, in- 
stead, diverted outside the country by organized crime. 

Two years prior to that, in 1994, I said our aid to Russia should 
be conditioned on assurances from Russia's government, and our 
own, that all is being done that can be done with respect to mon- 
itoring and countering the growing threat of these crime syndicates 
before they can choke off the infant democratic experiment in the 
former Soviet Union. This is about countering a real threat to the 
chances for a successful transition in the former Soviet Union, and 
it is about stopping an international crime wave before it crests on 
our own shores. 

Here we are five years and billions of dollars later and these 
questions may have risen to the level of a scandal. Unfortunately, 
not much has been done in the last five years. IMF Managing Di- 
rector Michael Camdessus recently said it is impossible to deter- 
mine whether specific capital flows from Russia, whether legal or 
illegal, come from a particular in-flow, such as IMF loans or export 
earnings. Apparently, once the IMF funds are released to the Cen- 
tral Bank there is no tracking where the money — in this case, $10 
billion — goes. 

American taxpayers deserve better. However, the New York 
Times recently reported that Clinton Administration officials 
learned of allegations of Russian money laundering at the Bank of 
New York five months earlier than they acknowledged, yet the Ad- 
ministration continued to rally for more aid to Russia, even though 
they were fully aware that these funds were not reaching the in- 
tended recipients and the intended recipients were the Russian 
people. 

Instead of making a genuine effort on critically needed structural 
reform, the emphasis was placed on touting feel-good stories about 
dubious successes in the Russian economy. So, in the end, funds 
flowed to a Russia where corruption ran rampant. Anti-money 
laundering laws were actually vetoed by Boris Yeltsin, and politi- 
cians did little but throw up their hands and say, "Well, that is the 
way things are in Russia." 

What I am interested in finding out today is whether the Admin- 
istration has acquiesced to the cycle of corruption in Russia so it 
could claim reform in name only. Policies that turn a blind eye to 
real reform do irreparable damage to the process of democracy 
building. This does a tremendous disservice to the people of this 
country and to the people of Russia, and I look forward to hearing 
from our witnesses today. 

Thank you, Mr. Chairman. 

Chairman Leach. Thank you very much for that very thoughtful 
statement. 

Ms. Waters, who was helping this committee on money launder- 
ing matters. Ms. Waters. 

Ms. Waters. Thank you very much, Mr. Chairman and Mem- 
bers. 

While there needs to be much said about the IMF and the way 
they have handled Russia, I am not going to concentrate my few 
minutes talking about the IMF's role in what appears to be the 
laundering of money by our banks, except to say it is obvious that 
there is a policy that Russia is too important to fail and that we 



12 

did turn a blind eye while the IMF shuttled about $11 billion into 
Russia and ignored the fact that corruption and money laundering 
was going on. 

I am going to concentrate my remarks on what we do here in this 
country about the laundering of drug money, because I do believe 
that we should have advanced a lot further than we have advanced 
in dealing with the laundering of drug money right here in our own 
country. We have had great opportunities to do so, and we are all 
to blame that we haven't done a better job. So I am not at all 
shocked that we have to convene once again to address the most 
serious issue of money laundering in the United States financial in- 
stitutions. 

As many of you know, I have worked very hard on the money 
laundering issue, particularly as it relates to drug trafficking. I was 
an original cosponsor of H.R. 405, the Money Laundering Deter- 
rence Act of 1988, and had four amendments which were included 
in the bill. I spoke in opposition to the Citicorp/Travelers merger 
due to the ongoing Department of Justice investigation into money 
laundering and other potential financial crimes involving Raul Sali- 
nas and Citibank. I have held press conferences and sent numerous 
letters to the Department of Justice, the United States President 
and Members of the House Banking and Financial Services Com- 
mittee. I have appeared on television shows and spoken on radio 
programs to discuss money laundering, drug trafficking and their 
devastating impact on America's communities. 

Last year, I introduced legislation to include money laundering 
as a priority when the Federal Reserve considers bank applications 
for mergers or acquisitions, and I have recently introduced the In- 
tegrity in Banking and Money Laundering Prevention Act of 1999 
to help eliminate money laundering in the banking industry. 

The House Banking and Financial Services Committee can do 
more to ensure that our financial institutions are free from abuse 
by alleged drug traffickers such as Semoin Mogilevitch, one of the 
leading figures in the investigation of money laundering at the 
Bank of New York. 

My remarks today will focus on three problems with our current 
anti-money laundering laws and legislative solutions to each. Law 
enforcement officials have stated that one of the biggest problems 
they encounter in money laundering investigations, particularly 
where there is an international flow of funds such as in the case 
where money flows from Russia to offshore accounts and then into 
accounts in the United States, is the inability to reconstruct an 
audit trail for prosecution purposes. This was a major obstacle in 
the case of Raul Salinas and is an obstacle for law enforcement in 
the present money laundering scandal. 

I have identified two areas that should be addressed to aid law 
enforcement in money laundering investigations. The first is proper 
maintenance of something known as "concentration accounts," and 
the second is adequate documentation of the beneficial owner of off- 
shore accounts. Concentration accounts are business accounts 
maintained by a financial institution in which funds from various 
sources are commingled. 

In July 1997, the Federal Reserve Bank of New York issued, and 
I quote: "sound practice guidelines" that highlighted concentration 



13 

accounts as a weakness in money laundering controls. The Federal 
Reserve reported that concentration accounts could, I quote: "mask 
unusual transaction and flows," making it nearly impossible to es- 
tablish the ownership of all funds in a single account. 

During last year's money laundering hearings on H.R. 405, I 
asked Herbert A. Biern, a witness from the Federal Reserve's 
Board of Governors, Division of Banking Supervision, about the po- 
tential for money laundering through concentration accounts. He 
stated that banking organizations should make sure that they have 
clear records about fund transfers, and if banks want to use a con- 
centration account, also called a "suspense" or "omnibus account," 
then they should keep proper records. 

My legislative proposal would require that banks who use con- 
centration accounts maintain all accounts in such a way as to en- 
sure that the name of the account holder and the number of the 
account are associated with all account activity of the account hold- 
er. This requirement will aid law enforcement and help to protect 
banks from money laundering abuses. 

Similar attention must be paid to offshore accounts. Offshore ac- 
counts are havens for money laundering and drug trafficker. In the 
case of Raul Salinas, a phony offshore company named Troika was 
set up which allowed Salinas to hide the flow of illegal drug money. 

In the present case, one of the key accounts through which 
money is suspected of being laundered belongs to a company called 
Benex, which investigators believe filtered money from Semoin 
Mogilevitch, the alleged kingpin of Russian organized crime. 

According to investigators, it is likely to take months before they 
can sift through the documents and penetrate the complex web of 
offshore companies and holding companies to determine precisely 
where the money came from and where it went. My legislation 
would aid law enforcement efforts by requiring enhanced record- 
keeping of beneficial owners of such offshore accounts. 

Finally, I want to address the penalties assessed against banks 
convicted of money laundering. We know that they laundered 
money. During an April 15, 1999, hearing on trends in money laun- 
dering, I asked a Department of Justice witness how many United 
States or foreign depository institutions had lost their charter as a 
result of a conviction or a civil penalty imposed for money launder- 
ing. The response I received from the U.S. Department of Justice 
is that no U.S. or foreign depository institution has lost its license 
as a result of money laundering activities in the United States. 

Well, my legislation would give courts the ability to double the 
sentence against persons and institutions that violate United 
States anti-money laundering laws with respect to foreign high-in- 
tensity money laundering areas. If we do not have the courage to 
address the practice in our own financial institutions, the money 
laundering abuses will only get worse. 

I have the greatest respect for you, Mr. Chairman, but I don't 
have any confidence that we are going to do anything about the 
laundering of drug money in our banks. They are too big to touch, 
such as in the case of Citibank, and Russia is too big to fail. So 
I am going to go through this, but I want to tell you, we have not 
shown that we have the courage or the desire or the will to do any- 
thing about the laundering of drug money, and we have known for 



14 

a long time about the Russian mafia, what they were doing on Wall 
Street, and we have simply turned a blind eye. I am disappointed, 
and at the point that it is now revealed, we have another hearing. 
Well, I will sit through it. 

With that, I yield back the balance of my time. 

Chairman Leach. The gentlelady has no time to yield back. 

The Chair would like to ask unanimous consent that his earlier 
statement be revised and extended — I had quite a lot that I didn't 
add to the record — and that the statements of all other Members 
be placed in the record at this point. 

I would also like to note that we have prepared a rather com- 
prehensive new approach to strengthening our money laundering 
laws. I am prepared to introduce today and ask that any Members 
interested in cosponsoring contact me or my staff. 

At this point I would like to ask unanimous consent Mrs. 
Biggert, you had a statement to place in the record. Is it all right 
to do so? 

[The prepared statement of Hon. Judy Biggert can be found on 
page 216 in the appendix.] 

Chairman Leach. And let me just stress as strongly as I can that 
money laundering may seem to be a modest crime to some people, 
but it is a window looking at far graver crimes. It is for that reason 
that it is of such significance. 

At this point, I would like to welcome for his first appearance be- 
fore this committee as the Secretary of the United States Treasury, 
Mr. Lawrence Summers. 

Mr. Summers, please proceed as you see fit. 

STATEMENT OF HON. LAWRENCE H. SUMMERS, SECRETARY, 
DEPARTMENT OF THE TREASURY 

Mr. Summers. Thank you very much, Mr. Chairman, Ranking 
Member LaFalce, Members of the committee. I have a rather 
lengthy statement that I prepared for the record which I will just 
attempt to summarize here and would ask you to include the en- 
tirety of the statement. 

Chairman Leach. Without objection, that will occur. 

Mr. Summers. I am grateful for this opportunity to discuss finan- 
cial policies toward Russia and the issue of money laundering more 
generally in light of recent reports and allegations regarding cor- 
ruption, capital flight and money laundering. 

Let my say at the outset, in the wake of recent allegations of 
money laundering through a U.S. bank, that we are fully commit- 
ted to the full investigation of these allegations, to the prosecution 
of any crimes uncovered and to strengthening our capacity to com- 
bat future abuses. 

I want to focus on four issues in my testimony: the broad context 
of U.S. financial policy toward Russia; the capital flight, money 
laundering and corruption in Russia; the very different financial 
policy toward Russia that we have had in place since the traumatic 
events of August, 1998; and our broader efforts to combat corrup- 
tion and money laundering worldwide. 

Turning to our policy toward Russia, it would be difficult to over- 
estimate the seriousness of the problems facing Russia today. At 
the same time, the American people have an enormous national se- 



15 

curity, economic and law enforcement stake in a peaceful and suc- 
cessful transition to a law-based democratic market economy in 
Russia. 

The United States has pursued these interests, both bilaterally 
and multilaterally, in a number of ways. We have sought to do so 
in a fashion that is both hard-headed and clear-eyed and puts 
America's interests at the forefront. 

The crucial multilateral tool to support economic reform in Rus- 
sia has been conditional finance from the international financial in- 
stitutions. Our support for official financing for Russia has been 
grounded on the recognition that we cannot want successful market 
reform in Russia more than Russia's government and its people do. 

We have sought, in supporting the conditionality of the inter- 
national financial institutions, to balance what would be best eco- 
nomically with what is politically realistic in the Russia context; 
between the desire to effect meaningful reform and the need to 
avoid taking decisions ourselves that Russia must ultimately em- 
brace for itself; between the goal of dismantling the apparatus of 
communism and the need to cushion the impact of the process of 
change. 

A review of the record of lending to Russia by the IMF and World 
Bank shows that these institutions have withheld financing when 
previously agreed-upon conditions have not been met, including 
twice in the context of the presidential election year of 1996 and 
including for nearly a year following the events of August, 1998. 

No one here in the United States, and certainly not in Russia, 
can be satisfied with economic developments in Russia during the 
past decade. But I think it is also fair to say, Mr. Chairman, that 
if not all our goals or Russia's goals have been fulfilled, it is cer- 
tainly equally true that not all of the fears for Russia that were 
common a decade ago have materialized. Russia is a very different 
country than it was a decade ago, with nuclear weapons no longer 
targeted at our cities; 1,500 nuclear weapons deactivated; with 
military spending one-tenth the level that it had reached in 1988. 
With 70 percent of Russia's economy output now generated by the 
private sector, the Communist system has essentially been disman- 
tled and the state's tentacles of central control have been largely 
dislodged. Economic distortions created by energy prices that were 
held far below world prices and the easy availability of subsidized 
credits have been greatly reduced. 

Let me turn to the specific and interrelated questions of corrup- 
tion, capital flight and international money laundering in Russia. 

Russia inherited huge corruption problems from the distorted 
economic system of the Soviet era. Since then, it has failed to es- 
tablish a rule of law and a credible law enforcement system, and 
corruption is a continuing and serious problem. It is one that we 
have recognized in the policies that we have supported and urged, 
both in terms of structural and institutional reform, to bring about 
the rule of law and, as I described in more detail in my written tes- 
timony, the placing of specific conditions aimed at reducing oppor- 
tunities for corruption made possible by Russia's economic and 
legal system. 

Let me give an example that comes from the Soviet expert,. 
Anders Aslund. In 1992, a barrel of oil cost in Russia the same' 



16 

amount as a pack of Marlboros. In that economic environment, the 
pervasive purchase of oil at a low domestic price and sale at a large 
international price was a major source of profiteering. Along with 
subsidized credits, in one estimate it represented corruption equal 
to 80 percent of GDP in that year. 

The international financial institutions have worked to bring 
about more open markets, prices approaching international levels, 
limitations on the supply of subsidized credit. The creation of a 
functioning — of a working tax system — has been centrally directed 
at combatting the opportunities for corruption that those distor- 
tions have permitted. 

If corruption is often indicative of a vote of no confidence in a 
state's capacity to enforce the rule of law, capital flight is a vote 
of no confidence in a country's economic policies. Capital flight 
drains perhaps $15 billion a year from the Russian economy. It will 
only be effectively addressed when an environment is created in 
which there are economic opportunities in Russia that make Rus- 
sians want to keep their money at home. 

These issues, capital flight and corruption, come together in the 
serious crime of money laundering. The current allegations involv- 
ing money laundering through major American financial institu- 
tions only reinforce our recognition that widespread corruption in 
Russia can pose a significant danger to our interests. 

In a telephone conversation earlier this month, President Clinton 
stressed to President Yeltsin the importance of swiftly designing 
and enacting a strong anti-money laundering law. President 
Yeltsin assured President Clinton that this was indeed his intent. 
In the context of ongoing IMF engagement with Russia, the United 
States and other major IMF shareholders will be monitoring Rus- 
sian developments in this area closely. 

Let me turn to the current stance of policy on the part of the 
IMF and the other international financial institutions toward Rus- 
sia. 

Following the economic and financial collapse of August, 1998, 
the International Monetary Fund ceased lending to Russia and did 
not provide any financial assistance for a year. The financial ap- 
proach going forward had shifted in a major way from providing 
new loans, new net funds to Russia in order to promote economic 
reform to instead partially refinancing debt coming due to the IMF 
as a part of an attempt to support economic stability in Russia. We 
have insisted that any support from the international financial in- 
stitutions be based on an adequate accounting and adequate safe- 
guards. 

The new IMF program is in that way very different from all of 
Russia's prior programs. The funds were provided in the form of 
Special Drawing Rights and paid into an account at the IMF that 
can be used only to repay Russian obligations to the fund. Under 
the new IMF agreement, Russia is to repay about $2 billion to the 
IMF over the next eighteen months and refinance the remaining 
funds coming due, thereby reducing Russia's net indebtedness to 
the IMF. 

Our continued support for IMF or World Bank engagement, even 
with these safeguards in Russia, is predicated on Russia's compli- 



17 

ance with crucial conditions to ensure financial integrity and to 
safeguard any assistance provided in refinancing. 

The nature of the audits with respect to subsidiaries of the Rus- 
sian Central Bank and with respect to the procedures of the Rus- 
sian Central Bank in granting credits and so forth are described 
in some detail in my testimony. 

Going forward, we in the G-7 will be calling for authoritative re- 
views by the IMF and World Bank to identify ways more generally 
around the world to strengthen safeguards on the use of IMF and 
World Bank funds, especially in cases where there is a heightened 
risk of diversion or misappropriations. 

Let me just say, in response to the Chairman's inquiry, that we 
are fully prepared to cooperate in investigations with respect to 
what is taking place with respect to IMF funds in Russia; though 
I would caution that some of the assertions that one encounters go 
beyond what has yet been established by evidence, although this is 
something that is obviously the subject of continuing close atten- 
tion. 

As we work to promote the adoption of sound economic reforms 
in Russia and around the world, combatting corruption and pursu- 
ing policies to reduce crime will be essential components of these 
efforts, including through our national and bilateral programs. 

This Thursday, as has been mentioned, in line with the legisla- 
tion in which Congresswoman Velazquez played such a crucial role, 
the Treasury and Justice Departments will release the Administra- 
tion's first National Money Laundering Strategy report. It contains 
several dozen recommendations to combat the types of criminal ac- 
tivity that we are discussing here today. And based on what I have 
been able to learn this morning, Mr. Chairman, I would say that 
it covers quite similar ground to your own legislation. This is an 
area where we certainly look forward to working together. 

During the past six-and-a-half years, we have faced very difficult 
questions of balance and very difficult choices in managing the 
United States relationship with Russia and in combatting corrup- 
tion and money laundering globally. It has always been clear that 
Russia's transformation from a centrally-planned Communist em- 
pire, ruled by the law of force, to a democratic, market-based econ- 
omy, based on the force of law, would take a great deal of time. 
We have sought, while always recognizing that Russia will shape 
its own destiny, to pursue what is the very great American inter- 
ests in Russia's outcome in a hard-headed and prudent way, as we 
will continue to do going forward. 

I welcome the opportunity for dialogue that this hearing presents 
on how we can all address this very crucial U.S. foreign policy and 
financial policy issue. 

Thank you, Mr. Chairman. 

[The prepared statement of Hon. Lawrence H. Summers can be 
found on page 234 in the appendix.] 

Chairman Leach. I thank you, Mr. Secretary. 

Let me say that I think the premise of the American policy of 
wanting to help Russia has always been correct. The effect of 
American policy is somewhat more in doubt. One of the great ques- 
tions is, when one sees that efforts are counter-productive, does one 
shift gears? That is a profound question. 



18 

A further witness of ours, an expert on Russia, Ann Williamson, 
has taped a series of interviews with former Russian officials. One 
Russian official, a finance minister named Boris Feodorov, reported 
that he asked Treasury not to include an IMF loan — this would be 
five or six years ago — of $1.5 billion, since he argued the loan 
would undermine his attempts to discipline the finance ministry. 
He suggested that corruption might be an issue. 

Other Russians, namely Sokolov, the chief auditor of the Russian 
Federation of Chamber of Accounts, which is an institution roughly 
equivalent to the GAO, has argued that he believed that virtually 
all of the funds coming into Russia would be diverted for less-than- 
perfect purposes. 

And so the question is, what do you, as a Secretary of the Treas- 
ury, believe should be the United States' policy in terms of a cir- 
cumstance where a foreign government appears to be entwined in 
a culture of corruption? Do we continue to aid it, because Russia 
is too big to fail, because a potential leader, as flawed as he may 
be, seems less flawed than others? Or do we say, "enough is 
enough," that no taxpayer an3rwhere can sustain the kind of "belt- 
way" investments where taxpayer funds are revolved in foreign 
bank accounts and then returned to this country in the hands of 
foreign corrupt officials or entrepreneurs? What does our Govern- 
ment do at this point? 

Mr. Summers. Mr. Chairman, let me distinguish the issues of 
policy going forward from the retrospective issues that were im- 
plicit in a portion of your question. 

Going forward in my testimony I laid out the approach that is 
in place, which is an approach that does not provide new funds to 
Russia, but that refinances a portion of the debt of Russia that is 
coming due to the IMF so that Russia is on net making repayments 
in this period. Because, given the pervasive problems in the rule 
of law in Russia, we do not believe at this point that the provision 
of new funds would be constructive and indeed could run into some 
of the risks that you described in your question. 

With respect to the earlier period, a balance was always struck 
recognizing that the provision of funds, which, as in the case of all 
IMF programs, goes to Central Bank reserves which are used in 
the currency markets to support stability, would advance the cause 
of creating an economic environment in Russia in which capital 
flight would be limited. And indeed, if one looks to the period from 
1993 to 1996 to 1997, what one sees is that Russia went from a 
country that was experiencing massive capital flight to a country 
that for several years was experiencing net capital inflows, reflect- 
ing the fact that there had been some improvements in the eco- 
nomic environment. 

In light of the policy errors that took place in 1997, the change 
in international conditions toward emerging markets with the 
Asian financial crisis, the fall in price of oil and the unwillingness 
of the Russian Duma to support reforms that would bring the 
budget under control, Russia was ultimately unable to maintain 
stability, and one saw the economic and financial collapse of Au- 
gust, 1998. That collapse, as serious as it was, should not obscure 
the fact that during this period one saw quite substantial economic 
change, from inflation rates in the thousands of percents, from 



19 

markets that were largely closed to the outside world, from state- 
directed plans to a market-based system. Those changes, which op- 
erated to reduce capital flight, were part of what these inter- 
national financial institution programs were about. We certainly 
supported them in a way that was mindful of the risks, but also 
mindful of the alternatives that could not have materialized with- 
out the engagement between the international financial institu- 
tions and Russia. 

Chairman Leach. I appreciate that perspective, but I think there 
needs to be a bit of an add-on, which is that, for the last decade, 
Russia has lost 40 percent of its GNP value. So one can hardly de- 
fine this as success. When we look at the last IMF funding, over 
$600 million went for the repayment of loans, which is an implicit 
acknowledgment, I believe, that prior loans had failed, and that it 
strikes me that it is pretty hard to defend that particular policy. 

Let me just end with the notion that somehow, as we look at this 
"beltway" of funds — and they are stunning. When you have a 40 
percent drop in GNP it is because capital flight has exceeded West- 
ern investment, which has been significant. And there does not ap- 
pear to be a concerted effort to put an end to that capital flight. 

There also — in a Western sense, we have always believed that 
public service involves some sort of idealistic — you have what ap- 
pears to be a self-serving nature of some in the Russia oligarchy 
elite that is very troubling. I don't think that it can be simply 
looked at, because some alternatives look worse over a period of 
time. It looks as if we have been ensconcing a system that maybe 
deserves a little more discipline. On retrospective, do you think 
that is the case or not? 

Mr. Summers. Let me say, first, Mr. Chairman, that with respect 
to the question of capital flight, it is best to think of capital flight 
in Russia or in another country not so much as a cause of economic 
problems, but as a symptom of economic problems. Because Rus- 
sia's economy wasn't working, because property rights weren't se- 
cure, because people could not have confidence in the value of the 
ruble, they chose to leave their money offshore or to take their 
money offshore. So capital flight was much less the cause of Rus- 
sia's economic problems in this period than it was a consequence 
of an economy that, as I think we have all recognized, wasn't work- 
ing in a satisfactory way. 

Now, there will be debates forever, I suspect, about what eco- 
nomic policies Russia could best have pursued. There would be 
those who argue that, had they moved more rapidly with the steps 
of reform, the results would have been better. There would be oth- 
ers that will argue had they moved more slowly the results would 
have been better. I am not sure that we will ever know the answer 
to that counterfactual question, but I certainly tried to make clear 
that no one here or in Russia can be satisfied with the performance 
of Russia's economy. 

Equally, I think it has to be recognized that the historically un- 
precedented magnitude of the four transitions, from empire to 
state, from dictatorship to democracy, from a criminal state to a 
law-based state, and from a Communist economy without private 
property to a private market economy, almost certainly made it in- 
evitable that there would be very, very substantial economic dis- 



20 

ruptions and problems during the transition, and the attempt of 
the international financial institutions was to influence that proc- 
ess in as constructive a way as possible. 

Chairman Leach. I appreciate that. 

My time has expired. There are many other Members who want 
to ask questions, and we may come back. 

I am compelled to note that what may be a system also causes 
a problem. That is fairly undeniable. 

Second, there is an analogy, and this is something that Ms. Wa- 
ters has been working on, some of the Mexico issues. I remember 
years ago, after being visited by a number of very extraordinary 
Mexican officials, hearing the observations from the Mexican ex- 
perts, they are extraordinarily well educated, but more than a few 
are crooks. 

Top Treasury officials have described some of the Russian team 
as a "dream team", but the evidence is emerging that part of their 
dream is self-serving. That is why I stress that public service is not 
about self-serving aggrandizement. It must be about idealism. It 
appears in this country that idealism as an element has elapsed, 
and that is one of the reasons there is such cynicism and hopeless- 
ness appearing in Russia today. And that is the single most impor- 
tant issue in many regards for American national security and for- 
eign policy. 

Mr. LaFalce. 

Mr. LaFalce. Thank you very much, Mr. Chairman. 

It is extremely difficult to fashion a policy and implement a pol- 
icy when you are taking the former Soviet Republic, see it disinte- 
grate into its several component states, and then watch and try to 
assist in the transition from what has been a centrally-planned 
economy to some form of market-based economy. The world does 
not have much experience with that, so it was difficult. 

Of course, we knew it was difficult at the time, and we knew 
what those difficulties were, too. We knew that crime was running 
rampant. We knew that they did not have adequate laws or any 
laws or enforcement with respect to privacy rights, property rights, 
bankruptcy laws, a transparency with respect to its banking sys- 
tem, enforcement mechanisms, adherence to international norms 
and standards, and so forth. 

It also seems to me, though, that one of our underlying premises 
should have been, let's not make this situation worse. There is 
going to be economic dislocations. Let's mitigate the dislocations, 
though, so that we do not see people going with less bread. We do 
not see people going with less heat. We do not see a decline in GDP 
if at all possible. 

So I think this argues for a more gradual transition rather than 
for an immediate transition. So it is damn the torpedoes, full speed 
ahead. So long as we can get rid of the state-owned industries, they 
ultimately will be better off, and ultimately it might be a long time- 
frame. You have to look at the difficulties that come in between. 

That is history. We have seen some good, and we have seen some 
bad. What are we doing today, though, within the present context? 
What are our imperatives? As one country, the United States, what 
are our imperatives as a country within the international forum 
that exists with respect to conditioning future involvement with 



21 

Russia and countries such as Russia? By involvement, I mean a 
broad spectrum of activities including financial assistance. 

What are we demanding with respect to reforms of their central 
bank, with respect to not just passage of legislation, but enforce- 
ment of that legislation with respect to property rights, with re- 
spect to the bankruptcy laws so there could not be precipitous with- 
drawal of monies. I guess we can't impose our will on another coun- 
try, but we can refrain from certain types of involvement with a 
country unless it is done in the right way. 

Do you care to respond? 

Mr. Summers. Congressman, let me answer your question in 
three ways. First, we are insisting on absolute safeguards with re- 
spect to our own money, namely the United States' own money, the 
IMF's money which is in part our money, in the insistence that 
that money not get to Russia, that it move from one IMF account 
to another account and that is all the money that is provided. 

Mr. LaFalce. What do you mean, from one IMF account to an- 
other? For what purpose then? 

Mr. Summers. For the purpose of repaying the IMF. 

Mr. LaFalce. So we are giving loans to finance pre-existing 

Mr. Summers. In effect, we are extending the portion of the debt 
that is coming due from Russia to the IMF. The remainder will be 
paid back directly from Russia to the IMF, and a portion is being 
refinanced, is being extended. Other than that, from the IMF, there 
is no new 

Mr. LaFalce. So you are saying that the United States' policy 
and the international financial institution's policy is no new money 
to Russia? The only thing that we will do is engage in some paper 
transactions for the refinancing or at least scheduling the existing 
indebtedness? 

Mr. Summers. That is the situation of the IMF. 

With respect to the development banks, there are a limited num- 
ber of loans that are directed at specific projects and specific pur- 
poses with closely monitored accounting for the use of the funds. 
The safety net for coal workers would be one example of such a 
program for the World Bank. EBRD assistance to funds for small 
businesses would be another example of such a program. So it is 
bottom-up. 

Mr. LaFalce. The total scheme of things, how much assistance 
would be given respectively through the IMF, which is exclusively 
for the refinancing of existing debt, and how much new money for 
these discrete purposes through the other international financial 
institutions — the World Bank, the European Bank — for reconstruc- 
tion, development, and so forth? 

Mr. Summers. Over the next year, I would expect it to be in the 
range of — someone behind me may correct me — a billion dollars 
oyer the next year. In toto, if you add all of the international finan- 
cial institutions together, Russia would be making a net repayment 
to all of the international financial institutions taken together over 
the next year. And then, of course, U.S. bilateral assistance and, 
niore generally, the international financial community bilateral as- 
sistance on questions like building a functioning tax system, estab- 
lishing a bankruptcy law, establishing protections for minority 
shareholders at the Russian SAC and so forth will be conducted in 



22 

a continuing and active way, because that is part of what I think 
we would all agree is the long-run imperative here, which is the 
establishment of the rule of law. 

Mr. LaFalce. Which comes first, the chicken or the egg? In other 
words, are we going to establish some of these actions as pre- 
conditions to the future assistance? That is the first question — or 
conditions subsequent. 

The second question is, you referred to the absolute safeguards. 
At least with respect to the IMF future assistance, do we have ei- 
ther absolute or some form of safeguards with respect to non-IMF 
or other, either bilateral or international, financial institutions' as- 
sistance? 

Mr. Summers. With respect to the other international financial 
institutions' assistance, there are very strong safeguards with re- 
spect to the accounting. Certainly with respect to U.S. bilateral as- 
sistance there are as well. 

Mr. LaFalce. What is the nature of those safeguards? 

Mr. Summers. The nature of those safeguards, for example, in 
the bilateral assistance is that, rather than providing money, what 
you are doing is providing services and relying on a whole set of 
U.S. contracting procedures and so forth. 

Mr. LaFalce. What about when money is provided? 

Mr. Summers. I would be happy to give you an answer in writing 
of the detailed procedures at USAID, but the essence of those pro- 
cedures is that the money is provided only on the basis of a clear 
receipt for specific services rendered. There is no money provided 
to Russian institutions for their general use as they see fit. It is 
specific funds for specific services. 

Chairman Leach. Thank you, Mr. LaFalce. 

The Chair has not set a perfect model, but he is at this point 
going to insist on maintaining the five-minute rule. We have a 
number of witnesses today. 

Mr. Bereuter. 

Mr. Bereuter. Thank you, Mr. Chairman. 

With regard to the comments about the drop in GDP, just to put 
that in perspective for the American people, Russia is still the fifth 
most populous country, with a GDP less than the Netherlands or 
Denmark, and the GDP is still going down. 

Mr. Secretary, congratulations on your assumption of the 
secretaryship. I regret that it is this subject that brings you here, 
but we wish you well as you pursue that job. 

I have three questions that I think you could address briefly. You 
mentioned we were looking for adequate accounting, of course, for 
the IMF funds. Given the size of that highly paid bureaucracy — 
some would say a bloated bureaucracy at IMF-— do we have a sys- 
temic auditing that you would regard as adequate at the IMF? You 
also may wish to enlarge that to the World Bank. 

Second, has the Treasury Department or anyone in the Adminis- 
tration spoken to the Russian prosecutor general, Mr. Skuratov, to 
try to confirm his accusation of Kremlin officials receiving kick- 
backs and improper market speculation on high-yield treasuries? 

And, third, Mr. E. Waymarry, head of the political section of the 
U.S. Embassy in Moscow from 1991 to 1994, claimed in a recent 
article that he, "Personally saw dozens of draft reports on economic 



23 

problems that were never transmitted while the Treasury rep- 
resentative blocked the negative assessment of Russia's capacity to 
introducing a market economy rapidly by arguing that would give 
Larry Summers a heart attack." 

Have you looked into whether or not there was an effort by 
Treasury people not to report what the real situation was in Russia 
to you when you were an Under Secretary and your boss was Sec- 
retary Rubin? 

Mr. Summers. Let me, if I could, Congressman Bereuter, answer 
the questions in the reverse of the order that you asked them. 

With respect to that report, it is the first that I have heard of 
anything like that. While we in the Treasury like to think that we 
have a lot of influence in the U.S. Government, I assure you that 
we do not have the capacity to censor the reporting from U.S. Em- 
bassies. And certainly of all possible rationales for limiting report- 
ing, the fact that it would shake the preconceptions of a policy offi- 
cial in Washington is the best reason for a report to be sent and 
certainly not for it not to be sent. 

Mr. Bereuter. Mr. Secretary, I am talking about self-censor. I 
am not suggesting that anyone told them not to say it. 

Mr. Summers. I am not aware — it would be a very serious prob- 
lem during a period when I am Secretary, as it would have been 
during the period when Secretary Rubin was Secretary, as it would 
have been during the period when Secretary Bentsen was Sec- 
retary, if anyone sought to prevent bad news from reaching Wash- 
ington. That is the opposite of everything that we stand for as we 
try to work with our staffs. I don't know where that report came 
from. 

With respect to the prosecutor general in Russia, I have not had 
any conversations with him. We have sought, I think appropriately, 
to compartmentalize the law enforcement channel with respect to 
ongoing investigations from the policy channel as these things are 
pursued. I think that is a question that would be best directed to- 
ward the officials with direct investigative responsibility. It may be 
a question that is better addressed in closed session. 

With respect to our satisfaction with respect to the reports that 
we have received, let me first say that we have strongly supported 
the idea that these audits are not to be done by IMF staff, but done 
by independent international accounting firms for some of the rea- 
sons that you cite. There have been reports that have come in that 
have provided clarity with respect to some issues, but there are im- 
portant outstanding issues. That is why my testimony is clear that 
there is a set of further conditions that have to be satisfied, not 
just in the economic policy area, but in the integrity area, before 
we would be in a position to support any further disbursements of 
this refinancing kind to Russia. 

Chairman Leach. Thank you, Mr. Bereuter. 

Mr. Frank. 

Mr. Frank. Mr. Secretary, I noticed in the testimony that we are 
going to be getting later that one of the witnesses noted that Amer- 
ican pressure did have an impact on Russian behavior elsewhere. 
He mentions the cooperation in Bosnia and Kosovo. He mentions 
dealing with Iran, some macro-economic policy. Obviously, we have 
the relative quiescence in the expansion of NATO. 



24 

I raise those because this argues the fact that pressures suc- 
ceeded there — and most recently many of us were enormously 
grateful for the Russian position with regard to Kosovo, because I 
think that helped get America out of an extraordinarily excruciat- 
ing moral, as well as political, dilemma. He argues that the fact 
that pressure succeeded there means that pressure would have suc- 
ceeded here. 

My question is whether to some extent the opposite might be the 
case. That is, if you simply accumulate pressure in all fronts with- 
out any tradeoffs that you are less likely to win. I don't say this 
critically. I say this critically of our structure. I wish you were here 
with Mr. Berger and Ms. Albright. Anybody who thinks we should 
have made policy toward Russia abstractly, solely on these kinds 
of economic and technical monetary problems, is wrong. Clearly, we 
have a whole complex of issues with Russia. 

So the question is, was there — I think it would be perfectly good, 
but my own sense is, yeah, people may have said, "Boy, this Yeltsin 
is no day at the beach, but on the other hand he is better than a 
week out in the snow" and we have some other things on the fire 
here. To what extent are tradeoffs and these other kinds of consid- 
erations involved? To what extent — when you talk about, for in- 
stance, cutting off Russia, if we got to the point where on these 
grounds that have been advanced that you thought Russia should 
be cut off from some of your areas, would you instruct your rep- 
resentative of the IMF to so vote without first checking or without 
talking to Secretary Albright or National Security Advisor Berger, 
not to mention the President? 

Mr. Summers. I think your very thoughtful question. Congress- 
man Frank, really points out why making policy in this area and 
other related areas is so difficult. One has to distinguish, if you 
like, between degrees of unsatisfactoriness. 

As I referenced in my testimony, you have to make a balance be- 
tween what would be economically best and what is politically real- 
istic. I think, on the one hand, as we manage a relationship, a fi- 
nancial relationship with any country, it is not possible to do so 
outside of the context of the overall issues that that country poses. 
On the other hand, we have also sought to remember that the 
international financial institutions have a basic core mission and 
have a basic responsibility with respect to the management of 
moneies. 

So, no, we would not under any circumstance tolerate money 
being provided without conditions or under circumstances in which 
the expectation was that it would simply be diverted and not be 
used for its intended purpose. That is a basic question of financial 
integrity. 

At the same time, certainly, in carrying on policy, one has to be 
mindful of the broad context. I think, as your comments suggest, 
the broad context is one where, if we had not gotten ever3i:hing 
that we wanted in terms of Russia policy choices, it is also true 
that many of the things that were feared not very long ago — hyper- 
inflation, collapse of the Russian state or return to communism and 
so forth, major nationalist revival in the anti-American faction 
have also not materialized. It is that balance that we have tried to 



25 

keep in mind as we carried on the policy on an Administration- 
wide basis. 

Mr. Frank. I think that part of what you are saying is one way 
to deal with this is to move toward more project-specific funding of 
the World Bank, Nunn-Lugar specific funding to deal with non-pro- 
liferation, so that to some extent the future orientation is less gen- 
eral budgetary support, more very specific and strings attached tar- 
geted aid. I think that is a reasonable direction to go in and may 
be the way to deal with this dilemma. 

The second question I have is just an abstract one. The Chair- 
man mentioned the drop in Russian GDP, and I realize it is a very 
significant drop. I would be interested — this is more of an abstract 
than an academic question, to retrogress you for a minute. 

One of the things we used to hear — and I will finish up in 30 sec- 
onds, Mr. Chairman — one of the things that we used to hear was 
that much of what the Russians produced in the old days, nobody 
wanted. Now, some of that obviously was military, but there were 
other goods. Do we have an analysis — obviously, there has been a 
drop in the production. But do we have an analysis of how much 
of that is a real drop in the quality of life? 

Everything that I ever read when I was studying the Soviet 
Union beforehand said there should have been a drop in the pro- 
duction of a lot of things which were produced and nobody wanted 
them. So do we have an estimate of what the real economic situa- 
tion is in Russia today as it was in the last days of the overture? 

Mr. Summers. I will get you a more precise answer in writing 
than I can give here. 

In general, in approaching your question, I would just emphasize 
these points: 25 percent of GNP previously on some estimates was 
military spending, and the loss of that presumably doesn't have a 
direct impact on Russian living standards. 

Mr. Frank. And a positive impact on ours. 

Mr. Summers. It is difficult to know how to think about wages 
that were higher relative to the price of meat than they are today, 
but you couldn't get meat at the store even after you waited in line 
for several hours. So what you see is the wage goes less far in 
terms of meat, but the reality is that you couldn't get the meat at 
the posted price before, and, if you could, it was with hours of wait- 
ing. 

All of that said, I don't think anyone can escape the conclusion 
that there has been a distinct reduction in living standards for at 
least large parts of the Russian population since 1989. I would take 
issue with the easy inference that has been drawn by some that 
that somehow economic reform took place too rapidly. 

If one looks at other countries, Ukraine, Belarus, other of the 
former Soviet republics where reform has taken place even less 
rapidly than in Russia, in many cases the fall in living standards 
has actually been significantly greater. And if one looks at some of 
the places in the Baltics or in the northern parts of Central Europe 
where reform has taken place more rapidly, what has happened to 
living standards has been somewhat more favorable. 

I think the core reason why the decline has been so great has 
been the combination of how militarized it was and how fundamen- 
tally distorted the composition of industrial production by military 



26 

need, and by industry that was based on oil at a very small frac- 
tion of the world's prices. 

Chairman Leach. Mr. Bachus. 

Mr. Bachus. Thank you, Mr. Chairman. 

Mr. Secretary, I think we all know that it has been stated here 
that Russia is too big, it is too nuclear, it is too inflational for us 
to ignore. I don't think there is really any serious doubt that we 
are going to continue to help Russia, we are going to continue to 
assist Russia. And despite what we hear from time to time within 
the Congress, the IMF and the World Bank, other organizations to 
do that, because there is really no one else that can play that role. 
Do you agree with that? 

Mr. Summers. I would agree with that, although I would caution, 
as I have tried to articulate, that the terms of their engagement 
and the approaches that they pursue have to change with condi- 
tions on the ground. And then, under current conditions, much 
more of a bottom-up approach and much less direct support to the 
foreign exchange market are appropriate. 

Mr. Bachus. I guess what I am saying is the IMF and the World 
Bank and the United States, we are going to continue to cooperate 
with Russia, we are going to continue to assist Russia. I think the 
questions that are helpful or not, whether we do that or not, be- 
cause we are going to do it — I am going to say it is a fact that that 
is going to be the IMF and the World Bank. I am going to approach 
my questioning from that standpoint, because I am going to as- 
sume those as given. 

In that regard, in many of the previous IMF loans to crisis coun- 
tries such as Korea, the Federal Reserve was brought in to help 
monitor and assist the IMF loan program. I am not aware that the 
Fed was asked to help implement the IMF Russia loan program. 
This is particularly disturbing, because there were and still are se- 
rious concerns about the effectiveness of Russia's Central Bank. 
Federal Reserve oversight would have been very useful since it ap- 
pears that the Russian Central Bank is plagued with conflicts of 
interest. 

I read an interview by the chairman of the federal commission 
for the security market. So this is Russians that are saying that 
it is engaged in conflicts of interest and, in effect, if — for instance, 
Russia's Central Bank was acting as a regulator for the commercial 
banks and at the same time they were speculating in Russia's 
short-term government debt market, the GKO. So my question to 
you is this: Why didn't you or Treasury ask the Federal Reserve 
to help implement the Russian loan program and were you aware 
of the serious problems of Russia's Central Bank? 

Mr. Summers. With respect to the second question first, certainly 
we have been aware for quite some time and most especially follow- 
ing the collapse in August of 1998 of integrity problems of the Rus- 
sian Central Bank, and that is a crucial part of why in the current 
approach none of the IMF funds will actually reach the Russian 
Central Bank and why, even for that refinancing, there are a whole 
set of conditions appended. 

With respect to the Korean case that you referenced, the Fed was 
not involved in the direct enforcement of the IMF conditions. The 
Fed was, of course, involved in deliberations about U.S. policy in 



27 

this area and particularly with respect to the use of the Exchange 
Stabilization Fund. There were officials from the Fed who, in re- 
sponse to the Korean government's request, provided technical as- 
sistance. Certainly, we in Treasury would be very supportive of any 
technical assistance efforts that the Russian Central Bank and the 
Fed could agree on. That is really a policy call for the Fed to make. 
But it would not in my judgment be appropriate, and it has not, 
to my knowledge, been the practice for the Fed to be involved in 
any case in the enforcement of conditionality. 

Mr. Bachus. Thank you. 

My second question is this: What we have seen in Russia with 
the organized criminal enterprises, the so-called mafia there, and 
also with government officials who may have been taking money 
out of the country, that is not something that we are not seeing in 
other countries. We have seen — literally forever we have been see- 
ing countries looted by corrupt leaders. 

I am particularly encouraged by the legislation that Chairman 
Leach is introducing and which I am cosponsoring, which is going 
to move, really — as long as we have these — we are going to have 
these organized criminal enterprises. Mexico, Colombia, and Russia 
are probably the three best known. We are going to continue to 
have corrupt government leaders, and others are going to launder 
money. It leads to terrorism, racketeering, tax evasion, drug smug- 
gling, all of this. 

There is one common denominator in all of this. That is that you 
have these offshore financial centers that are cloaked in secrecy 
and are poorly regulated and have almost no reporting. The legisla- 
tion that we are introducing would move to begin to take action to 
stop this. It is something that we have put up with too long. It is 
something that is going to need the G-7, action by the G-7. 

Can you comment on that? Is the world community, the G-7 — 
we are in a world economy. Isn't it time to shut down some of these 
operations or demand that they be regulated and that they report? 

Mr. Summers. Yes is the answer to that question. Without being 
in a position here to discuss the precise provisions of the legislation 
that you are introducing, which I haven't had a chance to fully 
study, and without getting into the full details of what is in the na- 
tional money laundering strategy, I think this is clearly an issue 
that has to be addressed; and I think it has to be addressed, frank- 
ly, for two interrelated reasons. One is the abuse that is made pos- 
sible by these offshore centers. The second is the pressure these off- 
shore centers put on the ability to regulate in our country and 
other major countries where satisfactory regulation becomes more 
difficult if there is the threat that it will simply produce recourse 
to offshore centers. 

But my own view, and this is something that I have stressed 
since I became Secretary as we worked on the development of the 
national money laundering strategy, is that a proper approach to 
offshore centers is overdue. I might just say that, as part of the 
work on the financial architecture, there is a kind of high-level 
steering group in the financial regulation area, the forum that has 
been set up, which has three projects underway with the strong en- 
couragement of the United States. One of those projects is directed 
at the set of issues surrounding offshore centers. 



28 

Mr. Bachus. I know your proposals. They are probably eight 
months late coming out, but I would hope that they are going to 
address this issue. Because as long as we have these offshore finan- 
cial centers, as long as they are poorly regulated, as long as you 
have the veil of secrecy, we are going to continue to give oppor- 
tunity to both these criminal enterprises and to corrupt govern- 
ment officials. The arms trade is going to continue to flourish. Ter- 
rorism is going to continue to operate wide open. And so I would 
certainly hope that that is in your proposal, too, and that the 
United States show leadership on that issue. 

Mr. Summers. This is a concern that we share. 

Chairman Leach. I thank the gentleman. 

At the risk of presumption, let me just add quickly to that. Our 
concern is American law, also international negotiations. The de- 
gree that we give advice to others — in economics there is a question 
of whether you should ever place controls on capital. But I don't see 
how any developing country should not absolutely preclude by law 
the movement of capital to poorly regulated financial centers super- 
vised by offshore institutions, because the only reason for doing 
that is for corrupt purposes, to not track capital. I think that is a 
bit of advice that the international community led by the United 
States ought to be giving to every country in the world, and we 
ought to take some of it ourselves. 

Ms. Waters. 

Ms. Waters. Thank you, Mr. Chairman and Members. 

While we all are confessing, we know that American policy al- 
lows for criminal activity if we feel it is in the best interests of our 
country. That is rather bluntly stated, but that is about what we 
are all saying. 

I must admit I am not naive about policies that we turn a blind 
eye to, countries that are sometimes acting in ways that we may 
not necessarily agree with, but we let it happen. I am aware of 
Zaire and Mobutu and the fact that we let him steal the money and 
on and on and on. 

How long have you known — ^Treasury known — about the money 
laundering, of this Russian problem? 

Mr. Summers. We have been aware of the seriousness of corrup- 
tion and capital flight from Russia and the likelihood that there 
were instances of money laundering since the beginning of the time 
that we were involved in Russian policy. With respect to the spe- 
cific investigation that has gotten a lot of attention very recently. 
Treasury officials learned of it in April. 

Ms. Waters. Just this past April? 

Mr. Summers. The specific investigation referencing the bank, 
referencing 

Ms. Waters. Was Treasury involved with the Justice Depart- 
ment in any way in the investigation of the Russian mafia before 
April? 

Mr. Summers. The Treasury investigative arms have cooperated 
with Justice on a number of different investigations and certainly 
some specific investigations involving particular Russian targets, 
substantially prior — significantly prior to last April, yes. 

Ms. Waters. Did the Russian banks offshore, like in Antigua, 
play any role in this money laundering and drug money launder- 



29 

ing? There are eight Russian banks in Antigua, a place that has 
60,000 people and 50 banks. Eight banks are Russian. 

Mr. Summers. To the extent that it is possible with respect to 
an ongoing investigation, we can provide a written answer with re- 
spect to what is in the public record regarding Antigua. 

With respect to offshore centers generally 

Ms. Waters. I want to know about Russian banks in Antigua, 
the eight Russian banks. 

Mr. Summers. To the extent that it is possible to respond to that 
inquiry, the investigative authorities are able to respond to that in- 
quiry, I will ask them to do so promptly. 

Ms. Waters. Let me follow up on what the Chairman asked. One 
of my pet peeves is the fact that our respectable banks wire trans- 
fer money to the banking centers in Antigua and other places, and 
we know why they are establishing them and what they are doing. 
What leadership are you going to provide to stop that practice? 

Mr. Summers. With respect to the general issue of offshore finan- 
cial centers, sometimes referred to as havens, I expect us to provide 
in the context of the national money laundering strategy a set of 
proposals. I think it will also indicate 

Ms. Waters. Do you want to see it stopped? 

Mr. Summers. Yes. 

Ms. Waters. Do you want to see the practice of wire transfers 
to money laundering centers that we know about stopped, period? 

Mr. Summers. Congresswoman, we want to see abuses stopped. 
We want to see abuses stopped, period. I think our challenge will 
be to craft rules that stop it, that stop abuses. 

Ms. Waters. Let me just say this. Given that we are not naive 
and we know that we have to work with countries even if they are 
not doing what we want them to do and they have practices that 
we would frown on, and Russia is important for all of the reasons 
stated, can you separate out drug money laundering in order for us 
to put our feet down and say we will not tolerate the laundering 
of drug money? That is my pet peeve. Let them steal IMF's money 
or our bilateral support, but how tough will you be on the launder- 
ing of drug money? 

Mr. Summers. We will in every feasible way that we can seek to 
combat money laundering of all kinds that you described, including 
drug money. The qualification that I made with respect to our de- 
termination to do everything we could to stop abuses was simply 
intended to indicate that as serious as these problems are, it would 
be, I think, a mistake at this juncture to conclude that all financial 
transactions, period, that involve certain institutions and offshore 
centers, are transactions of questionable legality. 

Ms. Waters. I am not concerned about trying to wrap this 
around everybody. I am only concerned about the laundering of 
drug money. 

Mr. Summers. We totally share your concern, Congresswoman. 

Ms. Waters. What will you do about it? 

Mr. Summers. In the national money laundering strategy and in 
the national reviews we propose legislation and administrative 
steps that will take all feasible steps that we can envision to go 
after this problem, and I might just say that we would be very 
grateful for any assistance and suggestions that can be provided to 



SQ.RM on - 7 



30 

us as to how we can more effectively go after this, because I think 
this is a very clear issue. 

Ms. Waters. I would like to co-opt the legislation and work with 
you. Ms. Velazquez has been working so hard on this, and others, 
and we want some cooperation to help us on the question of the 
laundering of drug money. Thank you. 

Mr. Summers. Let me just, if I could, note that we have acted 
and have issued an advisory with respect to U.S. banks specifically 
with regard to transactions involving Antigua, because of a set of 
concerns that have arisen and have been in touch with the authori- 
ties in Antigua as well regarding those concerns. 

Ms. Waters. Mr. Chairman, I have a list of every bank that has 
been convicted of the laundering of drug money. Not one has lost 
its charter. We have — even American Express International that 
was fined $25 million. I want to tell you these fines and asset for- 
feitures are simply the cost of doing business for these banks. You 
have got to put somebody out of business. 

Chairman Leach. The gentlewoman's time has expired. 

In this regard a law passed on a bipartisan basis, initiated by 
Ms. Velazquez, is calling for the Treasury to put forth a strategy. 
That is eight months in abeyance over a congressional law, and you 
are coming out with it this week and we are appreciative of that, 
but the timing is imperfect. 

Secondly on the timing front, the Financial Times reported in the 
last few days that British authorities told the FBI about the issue 
of the Bank of New York in September. A great congressional con- 
cern has been interagency cooperation, who tells what to whom. 

If Treasury did not learn about this until April, that is a rather 
significant time line. And so unrelated to legislation, but also in- 
volving legislation, the Congress does expect to have substantially 
greater coordination within the Executive Branch. 

The gentleman from California. 

Mr. Royce. Thank you, Mr. Chairman. 

Mr. Secretary, I understand there is typically a due diligence 
standard set in order to contain risks associated with a transaction 
to an acceptable level. According to the New York Times, you and 
Secretary Rubin knew of the investigation into allegations of Rus- 
sian money laundering and the Bank of New York before the latest 
round of IMF loans to Russia, but these allegations were not taken 
into account in setting conditions for the loans. Chairman Leach 
mentioned earlier the former Russian Finance Minister Boris 
Feodorov in 1993, did an interview with Ann Williamson, in which 
he reported that he asked you to not approve an IMF loan of $1.5 
billion since the loan would undermine his attempts to discipline 
the finance ministry. He further remarked we came to a modus 
operandi in Washington with the IMF which was essentially a car- 
rot-donkey process. In this sense, the IMF's role was gamesman- 
ship, because they never required any conditions for loans. 

In April 1993, the IMF decided to give $1.5 billion and on the 
26th of April, the former Russian finance minister reported: "I dis- 
covered that the budget deficit had grown, because once the money 
was promised, it was consumed immediately, mostly through graft 
on government importing schemes. I always told Larry Summers, 
Tou have the money and the wish to spend it, come and spend. Of 



31 

course, this money will ultimately be deposited somewhere in Zu- 
rich.' I told Summers that." And he goes on to say, "Once the 
money is given, there is no motivation to reform. That is one of the 
reasons why I left the government," says the former Russian fi- 
nance minister. 

My first question would be, what information did the Treasury 
Department and the IMF take into consideration in order to formu- 
late the due diligence standard as it applied to loans to Russia? 
Why did the allegations of money laundering not factor into these 
formulations, and in light of this, what specific due diligence stand- 
ards have been applied to the loans to Russia? 

Mr. Summers. With respect to the loans that were made subse- 
quent to our learning of the money laundering investigation in 
April of 1999, those reports only reinforced what were our extraor- 
dinarily great concerns about the integrity and the handling of 
funds following what took place in August of 1998. Our judgment 
at that time was that the appropriate form of new finance was one 
which would be provided in the form of special drawing rights to 
an account at the IMF which would not be eligible for use by the 
Russian authorities at their discretion, but could be used only to 
repay the IMF. In effect they could not get their hands on the 
funds for a use of their choice. That was a response to concerns 
about integrity which were reinforced by the reports that you have 
described. 

Mr. ROYCE. Of course Finance Minister Feodorov's statements 
were from 1993. 

Mr. Summers. Perhaps I could just respond with respect to those 
statements. 

It is correct that at certain stages during his time as finance 
minister, it was Mr. Feodorov's view that it would be better to 
delay the provision of support. And indeed at a number of those 
points the provision of support was delayed until specific accom- 
plishments were achieved, until there were certain specific steps 
taken. 

I would just caution that if one looks at the period from 1993, 
1994, 1995, one saw a period in which inflation rates in Russia fell 
from the thousands of percent to much lower levels. 

One saw in those years that much of the apparatus of the Com- 
munist state was dismantled. Clearly there was always a balance 
that needed to be struck between the risks of inhibiting the tend- 
ency to reform with the benefits of engagement and pushing the 
process of reform along. 

I would just caution that in making judgments I think it is ap- 
propriate to remember that in 1993 it was widely expected that 
there would be starvation in the cities, that hyper-inflation would 
break out, that there would be a return to communism and that 
the Soviet state would collapse. Those fears did not materialize. 
Certainly, not everything that was hoped for or all the goals that 
were set were achieved either. 

Mr. ROYCE. Of course he also brings up his concerns about not 
having conditions on the loans, graft on government importing 
schemes and ultimately the money being deposited somewhere in 
Zurich. That being brought up in 1993 should have been a heads- 
up. 



32 

Mr. Summers. I think there were a set of controls that were in 
place. Of course, IMF funds go into a central bank reserve and a 
central bank's reserves are used in part to intervene in a currency 
market. There is a large volume in the currency market. The vast 
majority includes the proceeds of exports, and so it is very difficult 
to identify where a particular dollar that comes into one side of a 
market that is only a small portion of that side ultimately ends up. 

The concern about capital flight was something that was always 
uppermost on everyone's mind in the design of these policies and 
that was why there was a strong effort to address its roots, inad- 
equate tax collection, in subsidized credits, in inflationary policies 
that caused the ruble to lose its value. 

I think it is very difficult to know what the counter-factual would 
be if different policies had been pursued. But the attempt was to 
strike a balance very mindful of the dangers of capital flight and 
dangers of corruption. 

Mr. ROYCE. Thank you, Secretary Summers. 

Thank you, Mr. Chairman. 

Chairman Leach. Ms. Velazquez. 

Ms. Velazquez. Mr. Summers, you said that the Treasury De- 
partment learned in April about the money laundering activities 
through the Bank of New York. Can you tell me what was the 
Treasury Department's response? 

Mr. Summers. Upon learning of that information, our inter- 
national colleagues in our international area notified Secretary 
Rubin and myself of their intention to go back to the Federal Re- 
serve System, where they had learned of it, to see if there was any 
information that pointed to the diversion of IMF funds that was 
contained in those reports. They did that, and they learned that 
there was no such information. 

What we did with this information was have it to serve to rein- 
force our large concerns about corruption and capital flight from 
Russia, which helped to shape the different approach to IMF en- 
gagement that is in place at this point. 

Ms. Velazquez. At the time were bank regulators notified so 
that those organizations which most frequently access bank records 
and money through bank records could track any suspicious ac- 
count through the Bank of New York? 

Mr. Summers. It was a bank regulator that notified us; namely, 
the Federal Reserve. And so it was presumptively aware of the sit- 
uation. I might say that through this whole period there have been 
what I understand to be close working relationships at the inves- 
tigative level between Treasury's Financial Crimes Enforcement 
Network and the relevant authorities in the Department of Justice. 

Ms. Velazquez. In 1998, the General Accounting Office con- 
ducted a study that found that 24 percent of Federal field agents 
did not know about any anti-money laundering problems or serv- 
ices offered by FinCEN. Would you tell me that under your leader- 
ship will the Treasury Department ensure that every law enforce- 
ment agency, whether State, Federal or local, would be aware of 
the resources that are available by the agencies? 

Mr. Summers. I can tell you that Secretary Rubin and I ap- 
pointed a new director of FinCEN a few months ago and that he 
sees as one of his central mandates with our very strong support 



33 

is assuring that there is full knowledge with respect to FinCEN's 
services in this area and we are more generally making sure that 
financial crime is something that is very much a focus throughout 
the law enforcement community. 

And I might say that, within Treasury, FinCEN is, of course, 
very involved in these issues and, just so I am very clear, FinCEN 
has been involved in analysis of this issue through a law enforce- 
ment channel prior to notification to policy officials in April. The 
IRS anti-crime unit and the Customs Service both also have had 
substantial roles with respect to money laundering investigations. 

Ms. Velazquez. My final question, Mr. Summers, how do you 
think the money laundering strategies focus on intergovernmental 
cooperation could have assisted U.S. efforts in the early stages of 
the Bank of New York case? 

Mr. Summers. I think there will need to be a careful examination 
of the approaches for sharing information both within the law en- 
forcement compartment and between the law enforcement compart- 
ment and the more general policy area. There are a very difficult 
set of balances in this area, because of the importance of protecting 
the integrity of ongoing investigations. 

Ms. Velazquez. Thank you. 

Chairman Leach. Thank you, Ms. Velazquez. 

Dr. Weldon. 

Dr. Weldon of Florida. Secretary Summers, I represent the 
East Central coast of Florida, it is called the Space Coast. About 
a year-and-a-half ago we had to lay off about 600 people at Ken- 
nedy Space Center partly because the Space Shuttle wasn't flying. 
You may have heard on some of the reports on Hurricane Floyd 
there was concern about $10 billion worth of Space Station hard- 
ware stacked up at the Space Center waiting to fly, and the reason 
that the Shuttle is not flying is we are waiting on a Russian com- 
ponent to the Space Station, something that the President had ne- 
gotiated with the Russians about six years ago. This element, it is 
about a $300 million element, a lot of money. I have personally met 
with Yuriy Koptev, the head of the Russian Space Agency, who 
tells me that he is not getting any money and that is why this 
thing is delayed. It is very frustrating to hear that some of the bil- 
lions of dollars that the IMF has sent to Russia has been siphoned 
off for illegal purposes, and that their economy continues to spiral 
downward, because of this huge flight of capital. 

Now, I am very pleased to hear you come before us today and 
say that we are not going to send them any more money and we 
are just going to refinance their existing debt, but I have a serious 
concern that maybe we should not even be doing that. By not ap- 
plying the necessary pressure by asking them to repay the debt, 
are we in effect going to not fulfill our fiduciary responsibilities and 
cause the current problems that we have over there to continue? 

In my follow-up question to that, do you really look at these IMF 
transfers in a true fiduciary way, the same way that a bank is re- 
sponsible when it lends money to an individual or a corporation? 

Mr. Summers. Dr. Weldon, let me try to respond to both parts 
of your question, if I could. 

With respect to the current level IMF approach, it attempts to 
strike a balance between being appropriately hard-headed, main- 



34 

taining the pressure for the necessary change, and at the same 
time recognizing that our involvement or the IMF's involvement 
does provide the opportunity for influence on questions like integ- 
rity of accounting. The current approach also avoids what I think 
otherwise would be the danger if all of these loans were called at 
the same moment, creating a very difficult financial situation and 
allowing the international community to become scapegoats for 
very real problems in Russia. In sizing the engagement, in timing 
the engagement, this is exactly the kind of balance that has to be 
struck. It has to be struck in a hard-headed way. 

With respect to the fiduciary question, if I can call it that, I think 
it is perhaps helpful for me to state what the nature and purpose 
of IMF support in a situation like Russia is. 

It goes to augment the reserves of the Russia Central Bank, 
Those reserves are then used in an effort to help stabilize the for- 
eign exchange market. There is a lot of trade in the foreign ex- 
change market. Most of trading in the foreign exchange market 
doesn't involve the IMF money on either side. It involves buying 
and selling based on people's judgments as to a price and where 
they want to have their money, so that it is difficult or really im- 
possible to identify what in some sense the ultimate use of a par- 
ticular dollar is. What can be audited and what has been audited 
is that the dollars that were provided by the IMF went for their 
intended use: Augmentation of Russian reserves and use in the for- 
eign exchange market. That doesn't go to address a whole set of 
concerns about the selected provision of credits within Russia, 
about the flows of information that took place within Russia that 
go to the integrity of the Russian financial system where there are 
obviously pervasive problems. 

But I think it is — without minimizing what are enormous prob- 
lems of corruption and establishing financial integrity and the rule 
of law — misleading to suggest on the basis of the evidence that is 
available at this point that there have been direct diversions of 
IMF dollars that should have been used for reserves in the foreign 
exchange market to some entirely different purpose. 

Dr. Weldon. Thank you. Secretary Summers. 

Chairman Leach. Mr. Bentsen. 

Mr. Bentsen. Thank you, Mr. Chairman. 

Mr. Secretary, I have a number of questions, some of which you 
have already answered. The Treasury Department learned about 
the Bank of New York situation in April of 1999. Is the Bank of 
New York, is that a national bank or is it a State-chartered bank 
or is it a bank holding company? My question is who is the primary 
regulator? 

Mr. Summers. The Federal Reserve. Just to be strictly accurate 
with the committee, the policy officials at the Treasury learned in 
April. There had been some cooperation at the law enforcement in- 
vestigative level between Treasury and law enforcement prior to 
April. But Treasury learned at the policy level in April, and the 
primary regulator is the Federal Reserve. 

Mr. Bentsen. Do you think that it would have been appropriate 
once the policy level was aware of this in April 1999, do you think 
it would have been appropriate to then notify up the line? I guess 
my point is that some have made the allegation that perhaps once 



35 

Treasury became aware of this ongoing criminal investigation, that 
perhaps even higher levels within the Administration should have 
been notified of this and that they should have gone as far as per- 
haps to notify high levels in the Russian administration that there 
was a criminal investigation going on involving a U.S. bank, and 
by not doing so, that there is some culpability or political culpabil- 
ity on the part of the U.S. Administration. Don't you think that 
would have been inappropriate behavior on the part of the Treas- 
ury Department to interfere with an ongoing investigation, and the 
appropriate course of action was to allow the investigation to carry 
out at the appropriate levels, rather than tip off the Russians and 
say, "We are investigating some of your activities involving your 
banks"? 

Mr. Summers. The practice and guidelines within which depart- 
ment officials operate, Congressman Bentsen, are to be very, very 
careful with respect to the discussion of or spread of information 
with respect to ongoing law enforcement investigations, and I think 
that history amply demonstrates the prudence of those guidelines, 
and that is why the approach that was taken when this informa- 
tion was brought to policy officials was to go back on the specific 
policy relevant question to the Federal Reserve through general 
counsel channels. But the policy practices under which department 
officials operate dictate that with respect to an ongoing investiga- 
tion being conducted by the Justice Department, it was a decision 
for the Justice Department to make in terms of broader notifica- 
tions. 

Mr. Bentsen. In response to a previous question asked you stat- 
ed that there is currently no evidence that multilateral develop- 
ment fund or international financial assistance funds, IMF, World 
Bank, have been misused or stolen or anything to the like based 
upon the audits provided to the international financial institutions 
and what Treasury has looked at. 

There is the case of Fimaco with the offshore transfer. Was the 
case there that the Central Bank transferred it to their offshore en- 
tity and then turned around and purchased government bonds pre- 
sumably to bolster — transferred funds in the general revenue — to 
bolster the government bond market, but otherwise there is no evi- 
dence at this point in time that any funds have been siphoned off 
for non-governmental activity? 

Mr. Summers. I want to make sure that we distinguish the Bank 
of New York situation from the Fimaco situation. 

Mr. Bentsen. Yes. 

Mr. Summers. With respect to Bank of New York there is no evi- 
dence that there were any IMF funds diverted. 

On the other question, there is ample evidence of integrity and 
corruption issues that have arisen in the Russian government and 
in the Russian Central Bank. But the report and the evidence at 
this point do not point to their having involved in the diversion of 
IMF funds to inappropriate uses. The concerns go more to the pro- 
vision of ruble credits, and they go to misreporting of the underly- 
ing situation through the use of the Fimaco subsidiary. 

But there are underway, as conditions for the ongoing IMF fi- 
nancing, further audits with respect to the ongoing activities of the 



36 

Central Bank and there are further issues involving other subsidi- 
aries of the Central Bank that have to be cleared up. 

Mr. Bentsen. Thank you. Thank you, Mr. Chairman. 

Chairman Leach. Thank you, Mr. Bentsen. 

Mr. Ryan. 

Mr. Ryan. Thank you for coming today, Mr. Secretary. I regret 
that I did not hear your opening testimony. I just flew in from Wis- 
consin. 

I want to read you from an editorial from The Economist a couple 
of weeks ago in describing the culture of corruption within Russia 
and our relationship with Russia. "Far from civilizing the wreckage 
of the Soviet economy, economic transactions between Russia and 
the West are running the risk of corrupting the Western side, if 
only by forcing it to wink at practices which would be outlawed in 
more established economies. There is a particular irony in the fact 
that one Western party is the IMF, whose stated purpose is to 
propagate virtues of sound economic policy and good governance. 
But if the IMF's integrity has been compromised, the cause does 
not lie in its own sloppy controls, it lies in the collusion of the 
American and Russian governments to cover up failures and press 
the Fund into treating Russia with greater generosity than its eco- 
nomic performance would warrant." 

It seems with news reports, with academia coming to Congress 
telling us that the Administration has kind of adopted a policy to- 
ward this Russian culture of corruption of "hear no evil, see no evil, 
know no evil," we need a new system to help the Russian people. 
It is my hope that this does not relegate into some kind of a par- 
tisan issue, but that we keep our eye on the ball. That is that we 
help the Russian people get a healthy growing economy with cur- 
rency that has a solid store of value. 

Have you considered, given the fact that the IMF themselves 
now will not send money into Russia, because they are unsure of 
the misuse of the funds, have you considered encouraging Russia 
to establish a currency board? And would a currency board be one 
solution which would help stabilize the currency regime in Russia, 
a central banking system which has been in turmoil since 1914, 
they have not been in full convertibility. Wouldn't a currency board 
be one solution that the U.S. and the IMF could encourage on Rus- 
sia which would be one way to thwart the escalating corruption, 
and I would ask you to look at the Estonia situation with the cur- 
rency board and hasn't that helped stem corruption and helped sta- 
bilize the currency market there? 

Mr. Summers. Congressman, it is something that has been dis- 
cussed and Mr. Feodorov, whom Congressman Royce was quoting 
earlier, has actually advocated a currency board in Russia. 

To be workable, a currency board system requires a set of pre- 
requisites. It requires, because it denies the government access to 
the printing press, a budget that is balanced. It requires that a 
banking system is functioning since one loses the ability for the 
Central Bank to provide direct credits to banks. And it requires a 
substantial external component of reserves and that the external 
component of reserves be readily accessible by anyone wishing to 
take money out of the country. 



37 

I think while the experience of a number of countries, including 
Estonia, suggest that currency boards can make very substantial 
positive contributions to economic stability, at this point the fiscal 
requisite, the stability in the banking system requisite, and the 
requisite that requires basic integrity in the economic environment 
so one is prepared to make an external financing of any capital 
withdrawal desired by any Russian, I think those three requisites 
certainly are not in place at this point. 

Mr. Ryan. With all due respect, that sounds like an endorsement 
for the status quo. It sounds like you are putting the cart in front 
of the horse. Isn't a currency board and a sound banking system 
the prerequisite for sound fiscal policy? Isn't a currency board and 
a sound monetary regime basically putting the cart in front of the 
horse, meaning that is how we can get a good fiscal situation 
cleaned up in Russia? 

Mr. Summers. Congressman, let me say that the status quo is 
very different than the policy that was in place a year ago prior 
to the economic and financial collapse, and it is very different in 
ways that are directly responsive to the concerns about corruption. 

There is no question that, as you suggest in your question, a cur- 
rency board can contribute to maintenance of stability. But if the 
appetite to spend is not commensurate with the appetite to tax, if 
there is no capacity to regulate wildcat banks, if the banking sys- 
tem is being used as an adjunct to subsidize industry, those are not 
things that would be solved by the imposition of a currency board. 

So I think almost all economists, including many of those who 
are most enthusiastic about a currency board as an ultimate objec- 
tive, would agree that there are very substantial steps that would 
have to be taken in the Russian context before a currency board 
can be considered. 

Mr. Ryan. Let me ask you this, and just looking at some of Stan- 
ley Fisher's articles, what if you set up a currency board and al- 
lowed foreign Western banks to go into Russia and to have sort of 
a banking holiday, for Russian banks in Russia to allow access to 
Western banks in Russia, to give us a better, transparent, incor- 
ruptible banking system. And a currency board — could that not be 
one solution as a way of getting monetary stability in the country 
without waiting for the fiscal side to develop, before then going on 
to the monetary side? 

Mr. Summers. I think that we have stressed in all of our policy 
dialogue over the last few years with Russia and other countries 
that quite apart from the question of capital controls which in- 
volves a different set of issues, there are enormous advantages to 
allowing foreign banks to take an active role in a country's finan- 
cial system as you propose, and we would be very supportive of 
that. 

Even if you had a major foreign banking presence, the basic chal- 
lenge of the fiscal year of commensurate taxes and spending is an 
area that would also need to be addressed as a requisite to a cur- 
rency board. 

I think at this point in Russia's political cycle with the political 
calendar that we are all aware of, the initiative for such a major 
imminent change in Russia is not there. So I think what is impor- 
tant is to focus on the more incremental issues of maintaining in- 



38 

tegrity and addressing banking and addressing banking problems 
as the issues of this moment. 

But I think the impulse behind your question that a stable 
money is crucial to a stable economy is exactly right. 

Mr. Ryan. So you are basically saying that you have to have the 
fiscal house in order before you can implement strong monetary 
changes? 

Mr. Summers. I think you would need to have a fiscal house 
much more in order than Russia's fiscal houses and banking sys- 
tems are in order today. 

Chairman Leach. The gentleman's time has expired. At the risk 
of presumption, putting the currency board aside, which is a credi- 
ble alternative, the United States of America encourages foreign 
banks. About 20 percent of our assets are controlled by foreign 
banks and we find it very healthy for the United States. Of modest 
advice to other societies, including Russia, would be to encourage 
the existence of foreign banks which operate under the rule of law, 
and I think it would be very helpful to Russian society if they were 
to open up to law-based banks as contrasted to a current system 
where many banks are money laundering centers for insiders. 

Mr. Vento. 

Mr. Vento. Thank you, Mr. Chairman. I regret that I arrived 
late on my flight, but I did look at your testimony, Mr. Secretary. 

On the issue of the IMF tranches and the new agreement that 
is in effect, the fact of the matter is that once the credit is ex- 
tended, we have a very difficult time trying to extrapolate how that 
credit may be used. In a sense, these dollars really go to keep the 
economy and the current circumstances that are in place, the good 
and the bad, functioning; don't they? 

Mr. Summers. Under the arrangements in place going forward, 
the funds will only be used to repay the IMF. 

Mr. Vento. Let me interrupt, Mr. Secretary. I understand that 
there will be a net payback of IMF loans, but in essence the econ- 
omy of Russia, with whatever the inadequate amounts going for 
space in some people's view, and whatever other enterprises are 
taking place, and some of it the corruption and the crime that is 
prevalent, there will in fact be sustained by this type of credit ac- 
tivity. These dollars are fungible. Some suggest that the efficiency 
is about 79 cents on $1 in terms of what is spent. 

So the fundamental decision here, I guess, is obviously in terms 
of new conditions, new requirements that are placed; and I read 
some of the list of conditions and I concur with them. I am not for 
a currency exchange board. I think a floating ruble is good. Even 
when the IMF guessed wrong last August, I think they had good 
intentions, but they made a mistake. 

But the issue here is one of whether or not we are going to sus- 
tain these conditions. Some have suggested that Russia and other 
countries that have the potential problems that they face — such as 
I suppose you can put China and Indonesia — are too large and they 
are too important to let slip away. I think that is a realization has 
been expressed here, perhaps not as bluntly as I am expressing, 
but it is a factor. We hope that gradually that they are going to 
grow from a Socialist, centrally controlled economy to a free market 
state. There are a lot of bumps in the road and there may be some 



39 

big holes. Maybe there is a black hole, I don't know. Do you want 
to respond to that? 

Mr. Summers. Your question describes very well the kind of bal- 
ances that are involved in making policy in this area trying to bal- 
ance what is economically best, and what is realistically achievable 
in the context. 

I think we need to always insist, as a base, on financial integrity 
with respect to the handling of assistance funds. At the same time, 
we need to recognize the broad political context in which we are 
trying to operate. We need to recognize the need for speed in dis- 
mantling the apparatus of communism. We need to recognize the 
unsatisfactory characteristics and the difficulties of integrity that 
many who come to positions of power have in many countries, and 
at the same time the fact that they are the representatives of the 
countries with whom we deal. 

So I think there are a difficult set of balances that need to be 
struck here. Our policy has been to try, in pursuit of American in- 
terests, to strike them in as appropriate a way as possible. 

Mr. Vento. As you pointed out, we have $15 billion a year of 
capital flight from Russia and there is an $80 billion export mar- 
ket. A lot of dollars are coming out and going back. We talked 
about the IMF tried to take on PricewaterhouseCoopers' audit to 
provide some air of security. Are there auditors and auditing sys- 
tems in Russia? Are there regulators? I know free market countries 
that don't have adequate regulators. It is sort of begging the ques- 
tion. They do not have. Can we really in effect audit and know 
where $80 billion goes a year or try to prevent a $15 billion loss? 
All of us would like to see the rubles remain in the country so they 
can achieve the type of economic success that we would like to see. 

What is the answer? These requirements here, lack of auditing 
capacity, lack of regulatory capacity in the banking and financial 
system, to say nothing of the civil justice system, the rule of law, 
these fundamentally are uneven at best, are they not? 

Mr. Summers. Congressman Vento, I would agree with every- 
thing that you have said about there being very substantial inad- 
equacies in the accounting and regulatory frameworks in Russia. If 
you look at our own country where the problems were much, much 
simpler, the development of those frameworks took us a very long 
time. 

What I think is prudent and appropriate for us is to insist on 
very specific auditing with respect to the specific funds that the 
IMF provides and rigorous safeguards with respect to those funds 
from the international financial institutions. 

With respect to the problem of capital flight, there is I think 
something that we can learn from the broad economic history, and 
that is that it is a King Canute-like task to try to stop capital flight 
by measuring every flow and putting — and erecting appropriate 
barriers and having satisfactory regulation. 

Capital flight stops when a broad economic environment changes 
to one in which a country's citizens decide that it is in their inter- 
est to make investments in their country. Until that change has 
been brought about, no set of administrative procedures will stop 
capital flight. And once that change is brought about, the adminis- 
trative procedures become less important and that is why support 



40 

for the broad direction of Russian economic reform and stability in 
Russia has to be a component of a prudent poUcy. 

But I think that the important thing for us to keep in mind is 
that this is a long-standing task that we will be with for a long 
time. 

Mr. Vento. Just stating a parameter, the $15 billion in capital 
flight does not all come to the United States. The $80 billion in ex- 
ports does not come here. The mistakes made by the IMF in terms 
of the floating ruble and the devaluation of it and the sort of un- 
controlled nature, not the lack of recognition, these are fundamen- 
tal mistakes. I disagree and I think most of us in hindsight could 
do well in terms of this interpretation, but I understand that the 
answers to that are not easy to come to as we look ahead. 

Chairman Leach. Mrs. Biggert. 

Mrs. Biggert. Thank you, Mr. Chairman and thank you, Mr. 
Secretary for participating today. Last week Secretary of State 
Albright was quoted in the New York Times, criticizing Russian 
leaders for failing to combat corruption. Secretary Albright said 
that the Administration would no longer support further multilat- 
eral assistance to Russia unless fully adequate safeguards are in 
place. Additionally, I think it was in another paper, she said that 
a close eye is always kept on bilateral aid as well. 

Do Secretary Albright's comments reflect the position of the Ad- 
ministration? Does that reflect what will happen with agreements 
that are already in the pipeline, that are already in the works? 

Mr. Summers. Yes, it does reflect the Administration position. 
And yes, with respect to all future bilateral assistance and with re- 
spect to the IMF and the international financial institutions sup- 
port, we will only support disbursements based on adequate safe- 
guards and adequate accounting. 

Mrs. Biggert. What about those that are just about to be forth- 
coming, would it be prudent to delay or cancel those as well? 

Mr. Summers. It would be prudent for them not to take place 
until adequate accounting and adequate safeguards are in place. 

Mrs. Biggert. So that there would be concrete evidence that 
those safeguards are in place? 

Mr. Summers. Absolutely. 

Mrs. Biggert. Thank you. Thank you very much. 

Chairman Leach. Thank you. 

Mr. Inslee. 

Mr. Inslee. I just want to make a comment and then I have a 
couple of questions. 

I read from our friends in the press who sort of suggested that 
these hearings are to answer the question "Who lost Russia?" and 
I want to say that nobody "lost" Russia, Russia was not ours to 
lose. And if Russia loses this opportunity to go to a law-based free 
enterprise system, it will be Russian failure, not American, and I 
think it is important to say that when we think about what we can 
or cannot do with regard to Russia. 

But if there is a new shift, when and if we ever get back to try 
to help them financially, and I appreciate the Administration's de- 
cision to essentially just refinance existing loans, if we ever do get 
back to that position, the first question: Should we consider re- 
thinking how we offer assistance to Russia, to go to a system of 



41 

maybe more micro-credit in the sense that we make individual 
lending decisions on our end of the pond, so to speak, rather than 
central banking decisions in Russia? 

Should we simply accept the fact that we are going to have to 
make those lending decisions here to have credibility and integrity, 
at least for some period of time? And we have had, as you know, 
some real success in a lot of developing nations with some of our 
micro-lending policies with specific entrepreneurs. Should we be 
thinking more on those lines rather than just sort of supporting the 
central banking system? 

Mr. Summers. Certainly I think doing as much as we possibly 
can in a micro-enterprise area should be very much a priority and 
should be something that we and the international financial insti- 
tutions should strongly support. 

In general over the last number of years in Russia, the con- 
straint has frankly been less the availability of external finance for 
micro-enterprise than the ability to put institutions in place on the 
ground that can identify enough loans. Not even all the money that 
has been allocated for this purpose has moved, because of the need 
for satisfactory control. 

I think that, Congressman Inslee, in light of the substantial 
debts that Russia has coming due, and in light of the fact that the 
conditions of stability in which micro-enterprise can function does 
depend somewhat on the macro-economic framework, it wouldn't be 
a good idea for us to make a blanket judgment about moving away 
from macro-economic support for change in Russia, although as our 
current policy limited to refinancing illustrates, that is an area on 
which we will have to be very hard-headed going forward. 

Mr. Inslee. Is there a way, if the American taxpayer is going to 
be providing some financial assistance or guarantees, if you will, 
should we be more rigorous in directing it to things that we may 
have a self-interest in; for instance, the command and control sys- 
tem of their nuclear force? Should we be trying to tie some of our 
assistance and say we want to see a targeting toward some specific 
concern? Should we be thinking in those terms? 

Mr. Summers. Yes. My discussions here today reflecting what 
are the responsibilities of the Treasury Department have con- 
centrated on the work of the international financial institutions, 
which I think covers primarily the areas that we have been dis- 
cussing. 

If one looks at the broad portfolio of U.S. policy, and particularly 
our bilateral assistance program, I think there is no question that 
a crucial aspect has to be the area that the Nunn-Lugar program 
represented in terms of supporting targeting of nuclear materials. 
I think there are questions in which Senator Domenici and many 
others have been active involving enriched uranium and plutonium 
fuels from Russia. 

I think there are a broader set of issues involved in defense con- 
version and housing for Russian military who are brought back to 
Russian soil. It seems to me that one of the great transformations 
is the defense conversion effort, and that is something that we have 
very large, very direct security interests in cooperating with the 
Russians on, and it is an area that is somewhat separate from the 
set of issues that we have been focused on today. 



42 

Mr. INSLEE. Thank you. 

Chairman Leach. Thank you. That concludes the last Member 
from our committee, but we have a guest, Mr. Weldon. 

Mr. Weldon of Pennsylvania. Thank you, Mr. Chairman. I ap- 
preciate the opportunity to sit through this provocative hearing and 
the comments made. 

I am here because I co-chair, with Congressman Steny Hoyer, 
the Duma-Congress Initiative, and we are very active with mem- 
bers of the Duma. Mr. Secretary, I was very much interested in 
your testimony, but before I get to that, I would like to, Mr. Chair- 
man, introduce members of the Duma who have been invited here 
to witness these hearings. 

I invited, and he is here, the Chairman of the Corruption Com- 
mission of the State Duma, Alexander Kotenkov. Would you please 
rise? The Deputy Chairman of the State Duma Committee on 
Budget, Taxation, Banks and Finance, Mr. Gitin. Mr. Gitin, would 
you please rise? Mr. Andrei is due to arrive along with Viktor 
Gitin. You will have a Duma deputy testifying tomorrow in one of 
your panels. 

In the twelve-page statement that you made, Mr. Secretary, 
which was very thorough and comprehensive, and for the record I 
have supported every initiative the Administration has had with 
regard to Russia, I have lobbied for the Nunn-Lugar program and 
have been trying to support the engagement with Russia. But in 
your statement there is no mention of the Parliament in Russia. 
There is no mention of the word Duma or Federation Council. In 
fact, the only time you referred to it was after you asked a ques- 
tion, and this was your statement: "that things were not moving 
forward because of the unwillingness of the Russian Duma to bring 
the budget under control." 

In fact, if you look at all of the concerns raised by our Govern- 
ment and the IMF, the budget and the privatization of land, the 
reforms, all of those require action by the state Duma. My conten- 
tion is that has been the failure. Our policy for the past seven 
years, in my opinion, has been so preoccupied with our two Presi- 
dents and our Vice President and the Prime Minister that we have 
forgotten that Russia also lives under a Constitution and that Con- 
stitution includes a Parliament, and that Parliament has a legiti- 
mate role to play. 

My concern is when the IMF goes in and attempts to ask the 
Duma to make tough reforms, like imposing new taxes on people 
for the water that they drink, for the electricity, for the housing 
which in the past they got for free, if I were a Duma deputy, I 
would say to the IMF and the U.S. Government: Go pound sand. 
Why didn't you come to us when you were spending all of this 
money in our country? Why didn't you come to us when policies 
were being developed as to where the IMF were putting dollars? 
Why didn't you come to us when we suggested that the regions 
should be benefiting where they are making reforms? Why didn't 
you come to us all along? Do not come at the eleventh hour and 
expect us to do the right thing simply because Russia's back is 
against the wall. 

In my opinion, that has been the failure of our Government, and 
I include the Congress and the White House. We have not done 



43 

enough to strengthen the institution of the ParUament in Washing- 
ton. 

I was in Moscow a year ago in September when this Congress 
would not approve IMF funding to let the most recent tranche at 
that time, and at the same time the Duma was opposed to the 
tranche of IMF funding. Why would the Duma be opposed to more 
money coming into Russia? Because the Duma deputies from all 
the factions look at this as a bailout of the corrupt policies of the 
Yeltsin government, of the cronies and the oligarchs who run the 
seven banks, the cronies who benefited from the billions of dollars 
that we put into Russia, and I would disagree that all of it is to- 
tally accounted for. 

I would make the statement that there are some cases where we 
have not been able to account for even the taxpayer money going 
into Russia. That is why the Duma was opposed to the IMF 
tranche. 

I came up with a set of eight principles. This follows up on Mr. 
Frank's suggestion that if we have some ideas, bring them forward. 
These ideas are two years ago, Mr. Secretary. Let me read them 
to you in summary form and ask which ones you disagree with. 

Number one: to establish a joint U.S. -Russian legislative over- 
sight commission to monitor every dime of Western money going 
into Russia. Not to dictate where it goes, but to make sure it is 
going to where it is supposed to go. 

Focus Russian resources on programs like housing that will help 
develop a Russian middle class; to make Western resources avail- 
able to reform-minded regional governments instead of running ev- 
er3^hing through the central government in Moscow. Deny corrupt 
Moscow-based institutions access to any further Western resources. 

Number five, reform the International Monetary Fund was a sug- 
gestion to me by George Soros the week I left for Moscow. He said 
the one thing that needs to be done is to put pressure on the IMF 
to establish an international blue ribbon task force to make rec- 
ommendations on how to deal with an emerging economy like Rus- 
sia's. 

And number six, Mr. Secretary, the Duma leaders agreed to this, 
and listen to this, to put the horse in front of the cart, make re- 
forms precede and not follow the resources. So something the IMF 
couldn't get Russia to do, that our Government couldn't get it to 
do, the Duma agreed to because we were tying it into these other 
changes focusing on the regions, making sure focusing on programs 
that create middle classes, to make sure there was an oversight 
process where the Duma could monitor inside of Russia where the 
dollars were going. 

The last two were to develop a joint action plan to engage CEOs 
of American companies with Russian enterprises and a mentoring 
relationship, some of which is being done now. 

And the last one was to bring over 15,000 young Russian stu- 
dents within three years to have them attend undergrad and grad- 
uate degree programs at American business, finance and economic 
schools with the stipulation they must go back to Russia to live to 
help create the next generation of free market leaders in Russia. 

We presented this plan to the President, and the White House 
told Speaker Gingrich, "we don't support it," and so Speaker Ging- 



44 

rich, to his fault, was not wilHng to stand up and have the Con- 
gress vote on it, yet the Duma agreed to it. 

My question, Mr. Chairman, if we are ever going to get Russia 
straightened out, we have to understand that Russia Hves under a 
constitution, and as much as I want Yeltsin to succeed, and I did 
all the way through, you have to engage the parliamentary bodies, 
the Duma and the Federation Council, because if you don't, you 
will never have the reforms codified that you and the IMF feel are 
so necessary. 

Mr. Summers. Let me just say. Congressman Weldon, how much 
we appreciate the work that you have done for a number of years 
with the Duma, and I think you are right in your central point that 
engaging with any country, you have to engage with the whole of 
its government and not just its president; and that should be, and 
I think will be, a priority policy going forward. 

There is obviously a balance that has to be struck, just as foreign 
governments in dealing with our country, there is a role for them 
in dealing with Congress, and there is a role for them in dealing 
with the Executive Branch, and a balance has to be struck. But I 
think there is no question that our approaches, going forward in 
Russia, will have to increasingly be from the ground up, and that 
is a theme that, if you like, connects Congressman Inslee's concern 
with micro-enterprise lending, some of the concerns that were ex- 
pressed about making assistance felt directly by the people. 

And I think it also goes to your suggestion for a political strategy 
in terms of a greater degree of engagement with the Duma. Of 
course, we are at a particularly complex moment in Russia's politi- 
cal calendar right now, and that is something the United States 
needs to be mindful of as it sets policy toward Russia, but I think 
that the central point of your eight principles, the need to engage 
more deeply with Russian society and not simply from the top 
down, is entirely correct. 

Chairman Leach. I thank you, Mr. Weldon, for your extremely 
thoughtful contribution. 

Just in conclusion, let me say that from the American perspec- 
tive, the principal issue isn't who lost Russia, but how we can help 
save Russian democracy; and I believe it would be an exaggeration 
to suggest that Russia is an economic Vietnam, but it would not 
be to note that any sense of history requires that the United States 
take all credible steps to ensure that the Cold War isn't revisited. 

In this context, corruption problems have a capacity to desta- 
bilize Russia and, therefore, the international political system. 
Issues of corruption and public service ethics have a National Secu- 
rity Adviser dimension. In this sense, our committee's basic juris- 
diction is over banking, and banks are intermediaries for good or 
for evil, and it is a challenge to all of us to ensure that financial 
systems are designed to serve people and not insiders, and that is 
an extraordinary circumstance that will reflect on, I believe, the fu- 
ture of not only U.S. -Russia relations, but much of Western stabil- 
ity. 

Anyway, we thank you very much for your testimony, Mr. Sec- 
retary, and we wish you well. And I would say I am particularly 
supportive of your last theme, and that is to begin from the bottom 
up, which is implicitly looking at the concerns of people first, rec- 



45 

ognizing that governments are to be accountable to people and if 
governments aren't accountable to people, other governments ought 
to be, and this Government ought to lead the way. 

Thank you very much. 

Mr. Summers. Mr. Chairman, Ranking Member LaFalce, thank 
you very much for having provided me with this opportunity for 
discussing both the crucial issues involved in U.S. -Russia policy 
and the crucial issues involved in making sure that the United 
States takes an adequately vigorous approach to financial crime. 
We in the Administration look forward to consulting with Members 
of this committee and other Members of Congress on these very im- 
portant issues as we go forward. 

Chairman Leach. Thank you, Mr. Secretary. The committee will 
now ask that the second panel come forward, and I will introduce 
them. 

Our second panel is composed of the Honorable James Woolsey, 
who is the former Director of the Central Intelligence Agency; Mr. 
Fritz Ermarth, who is the former CIA Chief Russian Analyst and 
National Security Council official; Mr. Paul Saunders, who is Direc- 
tor of the Nixon Center; and Mr. Vladimir Brovkin, who is a Pro- 
fessor at the American University Transnational Crime and Cor- 
ruption Center. 

We will begin in the order of introductions and begin with Direc- 
tor Woolsey. Mr. Woolsey, please proceed. 

Mr. Frank. Mr. Chairman, could you ask people who are doing 
business to clear the room. I think we are going to have trouble 
hearing. There are various conversations going on. 

Chairman Leach. The Chair would ask that there be order and 
that it is disconcerting for conversations to take place when our 
speakers are proceeding. 

Director Woolsey. 

STATEMENT OF HON. R. JAMES WOOLSEY, SHEA & GARDNER, 
FORMER DIRECTOR, CENTRAL INTELLIGENCE AGENCY 

Mr. Woolsey. Thank you, Mr. Chairman. If it is all right, I 
would submit this three-page statement and then just speak infor- 
mally from it for a few minutes, not reading it. 

Chairman Leach. Without objection, and I will say I am some- 
what disappointed, because I considered it to be an exceptional 
three-page statement, but please proceed as you see it fit, and your 
full statement will be placed in the record. 

Mr. Woolsey. Thank you, Mr. Chairman. 

It is an honor to be asked to testify today on this important sub- 
ject. I should begin by ensuring that you realize that my detailed 
knowledge of this particular issue — that is, Russian money laun- 
dering — is dated, is limited in scope and was highly classified at 
the time I was working on it several years ago, because of the 
sources and methods that we used in learning about it. 

My involvement arose because during 1993, when I was Director 
of Central Intelligence, some very able CIA analysts came to me 
with an excellent briefing on some aspects of Russian organized 
crime. I moved promptly to ensure that very senior officials at Jus- 
tice, the FBI, the National Security Council and elsewhere in the 
Government received this briefing. I commissioned a special Na- 



46 

tional Intelligence Estimate on Russian organized crime that had 
limited circulation because of the sensitivity of the sources and 
methods. I also put the issue on the agenda of some of our meet- 
ings with our allies at very senior levels working on this issue; and 
I think that through this, the U.S. intelligence community and the 
CIA in particular, performed a very valuable service in putting the 
issue squarely before those in our country and in some of our allies' 
governments who needed to know about it in order to take appro- 
priate action. 

I believe that this is one of the most important issues facing the 
United States, that is, the issue of large corruption in Russia, of 
which money laundering is one aspect, really for three reasons. 

First, organized crime and corruption together have the potential 
to destabilize the Russian state and Russia can still destroy the 
United States within the 30-minute flight time of an ICBM. Thus, 
its political instability and the unpredictability of any who com- 
mand and control its strategic systems are of course extremely im- 
portant to us. 

Second, there is the real possibility that Russian organized crime 
groups may become involved with the sale of technology or the ma- 
terial for weapons of mass destruction, and such sales could be 
profitable in the right quarters, for example in the Mideast, to ter- 
rorist groups or governments such as Iraq; and this, of course, is 
a major issue for the United States. 

Third, Russian organized crime can use its resources to corrupt 
institutions in the United States, and the recent case involving the 
Bank of New York may prove to be one such example. 

I have been particularly concerned for some time, Mr. Chairman, 
at the inter-penetration of Russian organized crime, Russian intel- 
ligence and law enforcement, and Russian business. I sometimes il- 
lustrate this point with the following hypothetical: If you should 
chance to strike up a conversation with an articulate English- 
speaking Russian in, say, the restaurant of one of the luxury hotels 
along Lake Geneva, and he is wearing a $3,000 suit and Gucci loaf- 
ers and he tells you he is an executive of a Russian trading com- 
pany and he wants to talk to you about a joint venture, he may 
be what he says he is. He may be a Russian intelligence officer 
under commercial cover. He may be part of a Russian organized 
crime group. But the really interesting possibility is that he may 
be all three, and that none of those three institutions have any 
problem with that arrangement. 

In addition to the above points, I have said publicly, Mr. Chair- 
man, that during the time we were working on this issue of orga- 
nized crime in Russia, Mr. Louchansky and his company, Nordex, 
were a focus of our attention. 

I would point out that since the second week of January of 1995 
I have been a private citizen. So let me turn now from what I know 
to what I just have judgments about, based on public sources. 

I have no reason to dispute the Russian government's estimate 
that criminal syndicates now control around 40 percent of the Rus- 
sian economy, and as you pointed out in your piece in the New 
York Times, Mr. Chairman, there are higher estimates as well. 
Former Interior Minister Kulikov said to me last week that the 
Duma has passed anticorruption legislation on five occasions that 



47 

has either been vetoed by President Yeltsin or sidetracked by him 
and his staff in some fashion. 

The heart of the matter seems to me to be the difficulty that we 
have today in finding an institution or group of individuals with 
whom we can work on a long-term basis. I might contrast the cur- 
rent Russian situation with that in Italy some years ago, when or- 
ganized crime was an extremely serious matter. But by working 
with Italian magistrates, who by law and by custom are the "un- 
touchables," in a sense, in the Italian system, we were able to help 
those magistrates make a substantial dent in the problem of orga- 
nized crime in Italy. 

In Russia, there are individuals with whom from time to time we 
can work, but there does not seem to be a critical mass at the na- 
tional level of honest magistrates of this sort, or any other arrange- 
ment which gives us a partner on a long-term basis. Perhaps the 
presidential election in Russia will bring some developments that 
will be positive; I hope so. But it is important for us to do what 
we can, even if we operate alone. 

Let me conclude with the following point. I have been asked fre- 
quently, since the story began to break a few weeks ago concerning 
money laundering through the Bank of New York, whether during 
my tenure I detected any lack of willingness at the senior levels of 
the U.S. Government to hear information about this subject. My 
answer to that specific question is, no, I detected no such lack of 
willingness as of January, 1995; but during the last several years, 
as a policy matter now, we have seen that to an extraordinary de- 
gree the United States has become identified with President 
Yeltsin and his senior people, the circulating list of senior people, 
and we have been quite generous financially, particularly through 
the IMF, with sending funds to Russia, and we have pushed for in- 
creased tax collections and tight budgets. 

Each of these approaches at one time or another had some defen- 
sible aspects to it, but if you step back from them and look at the 
overall pattern, it is very easy to see, as Congressman Weldon has 
pointed out, why ordinary Russians who saw us just a few years 
ago in very idealized terms have turned sour on the United States. 
In their eyes, we are the supporters of those who have stolen much 
of their national patrimony, through a highly corrupt privatization 
process particularly, and at the same time we are the ones who in- 
sist that the ordinary people of Russia bend their backs even hard- 
er. We are seen, in short, by average Russians as supporting the 
system and the individuals who are exploiting them. 

To them, America won the Cold War and then helped to give 
them a capitalist economic system that is modeled not on Silicon 
Valley, but on the Chicago liquor market of the 1920's. Something 
is badly wrong here, but the roots of the problem don't lie solely 
in our knowledge about, or our approach toward dealing with, Rus- 
sian organized crime. There are deeper, I think fundamental, 
issues in the approach toward Russia that we have, perhaps in a 
fit of absent-mindedness, adopted as American policy. 

I conclude with one final point, Mr. Chairman. Congressman 
Weldon was kind enough earlier this year to have me and former 
Secretary of Defense Rumsfeld and several others join him and 
other Members of the House in Moscow, meeting with some mem- 



48 

bers of the Russian Duma, and I became familiar then with the 
program which he described a few minutes ago. 

I think that his statement, and some of the questions by Con- 
gressman Inslee, as well as your closing remarks and some of the 
things that Secretary Summers said, could point the direction to- 
ward a rather middle way between the current policy and the with- 
drawal from engagement with Russia. In pursuit of such a with- 
drawal, some have even proposed cutting Nunn-Lugar funds, which 
I think would be extremely shortsighted. 

I would characterize Congressman Weldon's overall approach as 
a form of "tough love" in dealing with Russia. It has often been 
said that the Morrill Act, establishing land grant colleges, and 
mortgage interest deductability may be two of the most important 
things that the Congress has ever done in terms of building an 
educated middle class, and a homeowning middle class, in the 
United States. 

Many of the analogs that exist to those types of measures and 
others in Congressman Weldon's program seem to me to present a 
positive approach. Perhaps not every detail ought to be imple- 
mented precisely the way it is drafted now, but I believe if those 
in the Administration who have fostered the approach that I be- 
lieve has not succeeded and has brought us to this point, as well 
as those in the Congress who are proposing more or less a complete 
withdrawal from dealing with Russia, would get together and focus 
on some of the points and issues that Congressman Weldon and 
others here have raised, I think there is a way out of this. It will 
not be easy, but it does present the possibility of a positive ap- 
proach toward engagement with the Russian people in way that we 
have not been engaged to date. 

Thank you, Mr. Chairman. 

[The prepared statement of Hon. R. James Woolsey can be found 
on page 246 in the appendix.! 

Mr. Leach. Thank you, Mr. Woolsey. 

Mr. Ermarth. 

STATEMENT OF FRITZ W. ERMARTH, FORMER CIA CHIEF 
RUSSIAN ANALYST, NATIONAL SECURITY COUNCIL OFFICIAL 

Mr. Ermarth. Mr. Chairman, I am deeply grateful to you and 
the other Members of the committee for offering me the oppor- 
tunity to testify today on this extremely important agenda. 

Staff asked me to say just a word about my background. I retired 
a year ago from a 35-year career in serving the national security, 
twenty of it working for CIA, and in those years I was a national 
intelligence officer for the U.S.S.R., now Russia. I was the Chair- 
man of the National Intelligence Council, which prepares national 
intelligence estimates. I had two tours on the NSC staff, one under 
President Carter, one under President Reagan, and I also served 
in private industry. 

Throughout that period, I was primarily focused on things having 
to do with the Soviet Union one way or another, and of course, I 
continued my keen interest in Russian affairs after the collapse of 
the Soviet Union. 

I would like to focus my testimony on the larger context of Rus- 
sian developments that have posed the challenge before this com- 



49 

mittee, the challenge of organized crime and its various threaten- 
ing practices like money laundering. We can probably need to have 
little doubt that our law enforcement agencies and regulators will 
come to grip with this challenge. This committee will no doubt help 
in that endeavor, but we must keep the most important issues in 
the forefront, as the Chairman has done in his public statements 
and in his very gracious and, I thought, very timely statement in 
the Russian language to the Russian people here today. 

We must consider how our country's future security and well- 
being will be threatened if, once again, Russia fails in its historic 
mission to find a way to an authentic, stable democracy in a just, 
prosperous society with a market economy. 

My bottom line is that Russia is not lost. That is a strongman 
statement, as a matter of fact; we ought to ban it from the debate 
from now on since everybody's attention has been got anyhow. Rus- 
sia is stuck, stuck in a swamp, between the Soviet past and several 
alternative future possibilities, some of them bright and some of 
them ominously dark. 

The larger purpose of these hearings in this committee and in 
other committees at the Congress and in the debate now finally 
taking place in our political arena and in our press is to under- 
stand Russia's condition and prospects better and to inform better 
American policies for encouraging the brighter prospects of democ- 
racy and Russian capitalism. 

The threat from Russian organized crime springs from two fun- 
damental and interrelated realities: first, the grave weakness of 
the rule of law in Russia and, second, the perversions of what we 
have called "economic reform." 

The Communist system was itself a kind of structured lawless- 
ness. The Soviet Union had lots of laws. They were really tools in 
the hands of those who wielded power to use, abuse or ignore, and 
they left plenty of room for ordinary crime, organized crime and of- 
ficial crime or what I called authorized crime. And these possibili- 
ties of course expanded massively and rapidly with the collapse of 
the Soviet order. 

The collapse of Communist rule gave free rein to these phenom- 
ena in a completely new setting. Now, that new setting, which we 
have labeled The Emerging Capitalist Economy of Russia is some- 
thing for which I have not found a good definition. It has important 
features of democracy and capitalism, but it is not authentic de- 
mocracy or complete democracy, and certainly not authentic cap- 
italism. Focusing on the business and economic side, I would use 
the term "crony capitalism" without capitalism or at least much 
capitalism. 

By "capitalism," we mean investment for the building of wealth; 
that is not what was going on there. We see a lack of firm property 
rights and good corporate governance. We see a system that is 
more about the distribution and especially the concentration of 
wealth than it is about investment and the creation of wealth, and 
above all, we see a system that is about the extraction and the ex- 
patriation of wealth. 

We have used the term "capital flight" here. I think we have got 
to have another term for most of this because capital flight ain't 
what it is. It is the flight of loot rather than the flight of capital 



50 

in many cases. That is not just the criminal loot, but the plundered 
wealth out of the natural resource base. It isn't the same as a busi- 
nessman in Brazil making a profit on a business and then sending 
that money abroad, because it isn't safe or profitable at home. 

Now, this came about in large measure because of the manner 
in which the reformers of the post-Communist regime tried to cre- 
ate capitalism amidst the wreckage of the Soviet order. As one ana- 
lyst I have read put it, they proceeded in good Communist fashion 
to create a new capitalist class. By basically appointing them, rely- 
ing largely on privileged insider relationships, vast resources and 
enterprises were placed into private hands, often the old Com- 
munist hands, at less than fire sale prices. Enterprises were sold 
off at less than the cash value of their annual revenues. Export and 
import privileges were handed out to cronies like the sports funds. 
Even the church profited from this, alas. 

Thus, the process of privatization was, from the outset, a rip-off 
at the expense of the state and the society. This, along with the de- 
struction, the unnecessary destruction of people's savings through 
inflation in the early 1990's deeply blighted the public's view of 
capitalism from the outset. The reformers took a course certain to 
alienate society. They almost deliberately ignored the task of build- 
ing public understanding and support, a theme to which Congress- 
man Weldon spoke when he referred to the importance of engaging 
the Duma. 

Dimitri Simes, known I am sure to all of you who follow Russian 
affairs, tells a story of how on his last trip to Moscow, former Presi- 
dent Nixon visited with President Yeltsin and urged President 
Yeltsin and the reform team to pay more attention to building pub- 
lic and Duma support, at least a dialogue in the face of mounting 
opposition. President Yeltsin said, "Well, that is not what we are 
hearing from Washington. We are told we ought to just ignore 
them, the Duma and the opposition." This was in 1993. So the po- 
litical — or naivete is not too good a word for it, but whatever it is 
on our part started very early. 

Now, this style might have worked out had the new owners, how- 
ever privileged and unfair their access to this wealth, had they pro- 
ceeded to manage their new wealth as real capitalists, as real en- 
trepreneurs, by investing, building and creating as our robber bar- 
ons did, so-called; but far too often they did not do this. Lacking 
confidence that their new wealth could be profitably invested in 
Russia, even if they could hold on to it and not knowing in most 
cases how to turn resources into new wealth through investment 
and entrepreneurship, they all too often simply extracted it, 
stripped it, plundered it out of Russia and sent it abroad where it 
could be safe and productive, with little work by themselves other 
than financial and other kinds of bureaucratic machinations. 

In this matter, a country rich in natural resources and produc- 
tive potential saw its state and its society impoverished. The soci- 
ety and domestic economy reacted with various coping strategies — 
barter, trade, moonlighting work. The state had its coping strate- 
gies like not paying its bills and then very creative financing called 
the short-term capital bond market at high interest rates which 
aptly turned into a no-lose casino that eventually had to go bust 
despite the lavish spending of the IMF to keep it up. 



51 

What we have seen here is not so much organized crime as au- 
thorized crime, intertwined with corrupt government and poUtics at 
all levels. It has been abetted and has abetted itself by organized 
crime with its money laundering, its protection rackets and the 
like. 

The fundamental misdemeanor of Western, including American, 
policy was that it bought into this phony, crony capitalism too 
uncritically and for too long, and against obvious evidence you 
could have shut down all of Mr. Woolse/s colleagues on this front 
and it still would have been obvious. Intelligence brought its own 
very special contribution sources and methods of a sensitive nature, 
but you didn't need intelligence to see this. You needed an absence 
of intelligence — small "i" — to ignore it, but the government wasn't 
alone. The mainstream media, the mainstream foreign policy estab- 
lishment up and down Mass Avenue ignored it as well. The pro- 
tests of Western and Russian observers who knew what was going 
on went unheeded. 

One of the sad consequences of IMF lending, while aiming to sta- 
bilize and grow the economy, it actually lubricated, legitimized this 
plundering; at least that was the way a lot of Russians viewed the 
political meaning of IMF lending. I think it was more a perversion, 
than diversion, of IMF lending. Although I think there was some 
diversion, especially in July-August 1998. 

If one includes the period of the late 1980's, when much of this 
activity was begun under the aegis of the CPSU and the KGB, the 
representatives of the Soviet state itself, one might guess from 
$200 to $500 billion of "capital flight," "capital loot," has left Rus- 
sia. 

Now, some of it derives from crime. Some of it was completely 
legitimate, although it was trying to escape taxes, but most of it 
was in this gray zone derived from phony, crony, insider access to 
natural and other resources. Now, some of it comes out to be 
laundered, because it needs to be disguised, but a lot of it just gets 
deposited, just comes out where it is safe and productive and it 
doesn't stay in Cyprus. It goes to the biggest, most productive, most 
successful economy in the world, the United States of America. 

Here, it goes in several directions. Some stays and takes a nap, 
as I say, waiting for future opportunities. Some goes back to Russia 
for business, crime, for politics. A lot of it gets invested in portfolios 
and real estate and businesses, and I am sure that some of it goes 
into political contributions. 

Now, that might seem like an inflammatory statement, but I can 
make it with confidence for three reasons. First, the logic of the sit- 
uation. That is what this kind of money does. It is bipartisan. It 
won't go to just one side of the aisle, but that doesn't make sense. 
These people don't care about the issues or the values or the poli- 
tics. They care about influence. 

The second reason, I think, I can make this statement is because 
there are some examples in the press over the years; and third, be- 
cause FBI people who follow Russian organized crime in this coun- 
try have said it is so, it goes on. They don't know quite what to 
do about it if it doesn't involve direct violation of law, but they 
have told me that it does. 



52 

I would assign even greater weight, however, to a more general 
problem or threat. Money on this scale acquires friends, and those 
friends have leverage. How much leverage and with what effects on 
Government policies, I do not know, but that is a proper subject for 
inquiry by this committee. 

Did Americans heavily invested in the GKO market, this casino, 
this no-lose casino that eventually became a plundering of the Rus- 
sian state budget for the benefit of Russia and Western specu- 
lators — vast profits extracted, vast losses risked — did the stake- 
holders in that enterprise have influence over U.S. Government 
policy to encourage IMF lending last summer? Mr. Soros and oth- 
ers have strongly implied exactly that. 

Let me state that the picture, Mr. Chairman, that I have painted 
here is deliberately unfair, because it doesn't afford enough atten- 
tion to the positive. There is real capitalism and democracy in Rus- 
sia. There are decent businesses, honest policemen, clean politi- 
cians. 

Back to our first point, Russia is stuck, not lost. If the Russians 
can somehow get through these elections, the crisis of terrorism, 
create a somewhat stable and legitimate government, I believe 
there is a possibility that a real window for reform will reopen, 
that it could be done right. Certainly it can be done better. I hope 
that we shall be ready with supportive policies that are more per- 
ceptive, more honest and more constructive than they have been in 
the past. At least we have got to quit committing the errors of the 
past. 

Thank you, Mr. Chairman. 

[The prepared statement of Fritz W. Ermarth can be found on 
page 249 in the appendix.] 

Chairman Leach. Thank you. 

Mr. Saunders. 

STATEMENT OF PAUL J. SAUNDERS, DIRECTOR, THE MXON 

CENTER 

Mr. Saunders. Thank you very much, Mr. Chairman. Thank you 
also to the Ranking Member and other Members of the committee 
for the opportunity to be here today. 

Before I start, I wanted to make two minor bureaucratic points. 
First, my written testimony was prepared jointly with Dimitri 
Simes, the President of The Nixon Center, who unfortunately was 
unable to be here today; and second, that despite our respective po- 
sitions at The Nixon Center, our testimony does not represent an 
institutional position by the center as an entity and expresses sole- 
ly our private views. Moreover, to the extent that I drift from the 
testimony, I am expressing my views alone. 

I will discuss my prepared remarks only very briefly, because I 
would like to address some of the issues that came up in the dis- 
cussion this morning in a little greater detail. 

I think from the discussion this morning, it is clear that the Clin- 
ton Administration has been aware of the scope and scale of Rus- 
sia's corruption problem for some time, and that, for a variety of 
reasons, it has chosen either not to act or to take limited, ineffec- 
tive action. 



53 

In my view, this is a result of the Administration's overall ap- 
proach toward Russia and its division of Russian politicians into 
"good" and "bad." This was a gross oversimplification of the situa- 
tion in Russia. It led to the Parliament being put into "bad" the 
category with some of the consequences that Mr. Weldon outlined 
earlier. 

It also allowed the Administration to ignore the inappropriate or 
questionable actions of the so-called "good people" with con- 
sequences that we have heard about today. 

Turning to the question of who lost Russia, I don't think that it 
is an appropriate debate. Secretary of State Madeline Albright said 
last week that it was "arrogant to argue that we could have lost 
Russia, because only Russia could lose Russia." I agree whole- 
heartedly with that sentiment; but I would take it one step farther 
and say that is it arrogant not only to say that we could lose Rus- 
sia, but also to pursue the policy that we have pursued in recent 
years, believing that we know better than Russia's government and 
people what budget deficit level they should have, what inflation 
level is appropriate, or which specific people should be part of any 
given Russian government. That is one of the major problems of 
our policy toward Russia. There was a sense that we somehow 
knew more than the Russians did, that we could come up with the 
right answer for Russia out of the dizzying array of economic possi- 
bilities in the world. 

This led us to focus on macro-economic issues, the budget deficit, 
inflation rate, and others I mentioned earlier. 

These policies were advanced at the expense of other priorities 
that would have been much more desirable in the long term, such 
as the rule of law. 

I believe that if the Administration had pressured Russia and 
President Yeltsin more heavily on the rule of law, rather than on 
these economic issues, which ended up spoiling relations between 
the Russian executive and legislative branches and prevented the 
passage of legislation that would have encouraged investment and 
limited opportunities for corruption in Russia, we would be in a 
much better position than we are today. 

On that point, it is essential in thinking about Russia to decide 
what our priorities really are. Whether Russia's budget deficit is 3 
percent or 4 percent or 5 percent is not going to keep anybody 
awake at night in Washington, but if there is a return to some kind 
of authoritarian government, or if there is chaos in Russia result- 
ing from popular frustration with corruption and other problems, 
I think a lot of us could be awake at night. 

I would like to make one final point about the debate over our 
policy toward Russia. The Administration and its defenders have 
frequently tried to cast opponents to their policy as "cold warriors" 
opposed to engagement with Russia. I don't think that is really the 
correct way to frame the argument. 

There are many ways to engage with Russia that will allow us 
to have a very productive and mutually beneficial relationship. If 
we give more attention to the things that really matter in Russia, 
such as creating a rule of law system, we will be much better 
served in the long run. 

Thank you again. 



54 

[The prepared statement of Paul J. Saunders can be found on 
page 251 in the appendix.] 
Chairman Leach. Thank you, Mr. Saunders. 
Professor Brovkin. 

STATEMENT OF PROF. VLADIMIR BROVKIN, PROFESSOR, 
AMERICAN UNIVERSITY TRANSNATIONAL CRIME AND COR- 
RUPTION CENTER, ACCOMPANIED BY PROF. LOUISE SHEL- 
LEY 

Mr. Brovkin. Thank you very much for the opportunity to speak 
before this committee. I also should say that I am particularly hon- 
ored to be here, as I am a Russian-American. I spent half of my 
life in Leningrad, U.S.S.R., and the other half in the United States, 
having been educated in this country, but devoting my professional 
life to the study of Russia; and I am particularly grateful to my col- 
league and friend, Louise Shelley, the Director of the Transnational 
Crime and Corruption Center, with whom we have been working 
for the last two years on the problem of organized crime and cor- 
ruption in Russia. 

The written part of our remarks has been developed by the three 
of us — the two Directors and I, Keith Henderson and Louise Shel- 
ley. I will summarize briefly our major points, and also as we go 
along, give a couple of examples about the issues that we have de- 
veloped in these remarks. 

First of all, I should say that in the two years that we have been 
working on this project, actually funded in large part by a Depart- 
ment of Justice grant, we have come in contact with many, many 
Russians — journalists, politicians, prosecutors, street cops — and we 
have developed very good relations with many of them. In July 
1998, we held a money laundering conference at the Federation 
Council in Moscow which was extremely useful and very revealing 
in terms of the processes and mechanisms of how money launder- 
ing works; and a lot of debate was going on about the formulation 
of the money laundering law in Russia, which still hasn't been 
passed. It also showed that the term "money laundering" is under- 
stood in quite a variety of ways and certainly very different from 
what we understand here in the United States, which also needs 
to be addressed in a future discussion. 

We have just returned from Moscow, where we had a conference 
on corruption, sponsored by us and our partners in Russia with the 
Institute of State Law and the Russian Academy of Sciences, and 
I am not going to spend time summarizing it. It is all going to be 
on our Website. But what I would say is, I was struck with the de- 
gree of openness, the degree of frankness when the Russian pros- 
ecutors and officials were talking about their problems in front of 
Americans. This was totally inconceivable five or six years ago, let 
alone in the Soviet period. 

Moreover, what I also think you all will be pleased to hear is, 
the kinds of proposals they have developed are very much in the 
American spirit. They were talking about the conflict of interest 
law that they would like to introduce, about the statement of in- 
come for the relatives of civil servants, about the ethical code of be- 
havior for the civil servants and many, many other interesting ini- 
tiatives. So it is one more time to emphasize that when we do 



55 

speak about corruption and organized crime in Russia, that should 
not mean that there are no serious attempts made by many honest 
Russians to combat this problem. 

But now to our comments, and essentially what we are arguing 
in this paper, in this presentation, is that the scandals that have 
been filling the pages of the world press recently are a wake-up call 
that reveal several fundamental problems that have been plaguing 
the Russian and American financial communities. It should be a 
wake-up call to the Congress, to the White House, to multilateral 
institutions such as the IMF and the World Bank, financial institu- 
tions and regulators, and the public at large. 

We do have extensive analysis of the mechanisms of the phe- 
nomenon of money laundering and capital flight, and in a nutshell, 
we are convinced that it is not just a Russian problem. It is not 
just a Russian organized crime issue, because respectable American 
and multinational companies, financial institutions in many coun- 
tries — in U.S., Swiss, Russian, United Kingdom, Cyprus, and many 
other offshore zones — have been involved in this, and therefore, if 
money was flowing through all these places, it is not just a Russian 
problem. There is a serious problem on this side. Some of my Rus- 
sian colleagues tell us, "You" — meaning Americans — "benefit from 
this; you make all the money and we lose all the money." So this, 
of course, is something that should be of concern to this committee, 
that Russia is losing capital it badly needs, that is, of course, leav- 
ing Russia for a variety of reasons. 

What we have done in our TraCCC Institute is reconstruct some 
of the models of illicit capital flight and try to develop typologies 
to distinguish what is a capital flight, as opposed to theft of natural 
resources, as opposed to illicit proceeds that would be criminal 
under one system and not criminal under another system. 

We have a term, such as "skimming," which is double accounting, 
which is a part of the resources are exported, and if the revenue 
stays in the West, if they had to pay taxes, it would be totally le- 
gitimate parking of your capital abroad. If they have done that, 
then there is no crime of any kind; but if they not paid taxes to 
the Russian authorities, then it is tax evasion. But again, it de- 
pends on which law and in which country the money is parked. 

We are also developing typologies of how front companies, or 
what the British call "shell companies" operate, and that concerns 
mostly the Russian export sector. And that, of course, directly in- 
volves money laundering, but again it depends which laws have 
been broken and in which country and whether that would qualify 
as money laundering or not. 

Our estimate is that of the total figure, $15 billion, that is leav- 
ing Russia, probably about a third is what you could call hard-core 
criminal proceeds; the rest of it is either semi-legitimate or simply 
money parked abroad since the ruble is undesirable currency. 

We believe, and we do state in this statement, that these proc- 
esses represent a national security threat to the United States, to 
the financial stability of the Free World and also to Russia, and of 
course, many other countries such as Mexico, Indonesia, and 
Brazil. We do think that it is essential to rethink the financial 
structure and the national security aspects of it; and it is my term 
that I add, that we need to think about containing the threat of 



56 

global organized crime with the same seriousness as we thought 
about containing communism, because in today's world the 
transnational organized crime networks represent just about an 
equal danger to the financial stability of the United States and the 
world as did the Communist threat, if not more so. 

We also believe that if left unchecked, these processes of corrup- 
tion and organized crime will lead to serious social damage to Rus- 
sia and CIS countries and many other developing countries, be- 
cause dirty money feeds the caucus of criminal networks involved 
in a number of activities we studied, such as nuclear and weapons 
smuggling, narcotics trade, and trafficking in human beings, espe- 
cially exploitation of women and children. So there is a component 
of human rights here that is extremely important. 

As far as the loans are concerned, much has been said today 
about this, the IMF and the World Bank. We are convinced that 
new policies and procedures for dispensing and monitoring aid and 
loans must be developed. As Keith Henderson put it, "Know your 
donee" rules, conditionality, sanctions, independent audits and civil 
society monitoring and oversight mechanisms must be developed 
and enforced. For diplomatic and political reasons, government and 
multilateral companies may have to sometimes deal with corrupt 
public officials. However, they should not do so with a blind eye to 
accountability. 

And here I should add in view of the discussion this morning 
that I myself was in Russia, as a matter of fact, attending the 
money laundering conference in June 1998, exactly June 1998, and 
this is in regard to Congressman Weldon's comments. And that is 
that this is the time, if you recall, that Mr. Chubais, who was ap- 
pointed as the negotiator on the Russian side with the IMF, and 
the way it was presented when finally the news broke that the IMF 
released the tranche was that the Duma would have to accept an 
anticrisis program. But nobody knew, and it was never publicized 
or said anywhere what exactly IMF wanted Russia to do. So the 
Duma perceived this as a kind of a hidden deal behind closed doors 
between Mr. Chubais and the American Government. 

Now, to make their fears worse, Chubais appeared on national 
TV — and I saw it myself — and he said if the Duma does not pass 
an anticrisis program, the administration, meaning President 
Yeltsin, would find other means to implement the program which 
was, of course, a clear threat in regard to the Duma. Now, of 
course, the Duma would not be very happy with operating under 
such conditions. 

What we are suggesting is that there should be more trans- 
parency in the interest of the IMF and accountability in the way 
that deals are concluded and adopted. 

And finally, one more point on this subject that Secretary Larry 
Summers was talking about this morning, and that is that there 
is an open revolving door. Where is the money of the IMF? And 
when it goes into the budget, you would never know whether that 
is the budget or not. But let me give you an example of the situa- 
tion at that time, June-July 1998. 

Suppose that you know from the inside of the government that 
$4 billion is coming to the Russian budget. Now, what does that 
piece of information mean? It means that immediately the GKO 



57 

rates go up, because everybody knows the government will have 
more money. So that means that from 60 percent, in two weeks, 
the Russian GKO market rates went to 123 percent, which means 
that if you are buying up the GKO, you are making a lot of money 
in full confidence that the government will support the ruble, that 
is, will support its financial system. 

In other words, what is happening is that the IMF money is com- 
ing into the budget and the state is giving it away essentially to 
privileged banks through the mechanism of high interest rates on 
GKO. 

In other words, you don't really need to siphon off or channel any 
of the IMF money on the side. You do it by buying GKO at 123 
percent a year, and conversely, if you do know that the ruble is 
going to fall, you sell the GKO and that is how several of the Rus- 
sian privileged banks made a lot of money in August. 

Mr. Leach. Thank you, Mr. Brovkin. 

Can you summarize very quickly your statement? You are going 
on a little bit longer than the other panelists. Can you summarize? 

Mr. Brovkin. Yes. 

Finally, I go to our recommendations in one minute. I think that 
it is essential to rethink the regulation of the financial market 
mechanisms as was spoken today, before. We believe it is essential 
to be more vigilant in addressing grand corruption and no looking 
the other way, regardless of how high ranking the government offi- 
cials are. The lawyers, investment bankers, accountants, were in- 
volved in facilitating corruption in organized crime, and it must be 
subject to great scrutiny and appropriate sanctions. 

We believe that it is essential to foster interagency cooperation 
both in drug-related and in non-drug-related money laundering be- 
tween the intelligence community, law enforcement, political and 
financial analysis between the United States and Russia. 

We also believe that it essential not to politicize the issue of cor- 
ruption in Russia, but rather present it in a way that the Russian 
people will be the beneficiaries if they have a clean government, if 
they have transparency and if they have banks that keep their 
money rather than expropriate it every several years. 

Next point, we believe that it is essential to restructure the Rus- 
sian banking system. Much was talked about it this morning, to 
abolish the privileged banks that handle the state budget and are 
a source of corruption and money laundering. It is essential to 
work together with the Russian financial institutions in trying to 
implement the kind of ideas we heard this morning. 

It is also important to bring money from the shadow economy 
into the real economy and institute a number of measures with 
international support that would make repatriation of Russian cap- 
ital into Russia. If things go the way they do, Russia will have seri- 
ous economic and political upheavals. The country cannot sustain 
a loss of $15 billion a year. 

Russia needs to enact legislation and adopt effective enforcement 
strategies in the judicial and taxation sector. Great oversight is 
needed in the international loan policy. More attention must be 
paid to preventing diversion of money by corruption and organized 
crime. 



58 

And finally, the tenth point, great attention must be paid to de- 
veloping policies to seize and repatriate assets and to promote de- 
velopment in public policy goals. 

Thank you. 

[The prepared statement of Prof. Vladimir Brovkin can be found 
on page 255 in the appendix.] 

Chairman Leach. Thank you. Professor. 

Let me turn first to Mr. Woolsey. In your statement you indi- 
cated that in 1993 you approached high levels of the Government, 
the IG and Justice Department, and so forth, about information 
your agency received related to corruption. Can you tell us, did this 
information that you relayed involve government officials and offi- 
cial resources, Western or Russian? 

Mr. Woolsey. This did not really focus on the senior individuals 
in the Russian government at that time, Mr. Chairman. It was ba- 
sically, as I recall — and I haven't read it now in over five years — 
concentrated on how organized crime was working in Russia, what 
areas they were getting into, how successful some Russian orga- 
nized crime groups had been, and it was basically sort of an intro- 
duction to the seriousness of the problem. But at that point in 
1993-1994, I don't recall that any of our focus was that there were 
really any indications of corruption at very senior levels of the Rus- 
sian government. 

Chairman Leach. You referenced in your testimony a concur- 
rence with some of the statements of one of your successors, Mr. 
Deutch, about the Louchansky-Nordex matter. 

Mr. Woolsey. Yes. 

Chairman Leach. I wonder if you could provide the committee 
some perspective. Who was Mr. Louchansky? Who was Nordex? 
What is the relevance of this, particularly to Mr. Ermath's asser- 
tion that perhaps there are political monies that have entered into 
the American process. 

Mr. Woolsey. Mr. Chairman, my recollection of the details of 
that analysis, as I say, are over five years old. I haven't read any 
of that material since then. 

At the time, the reason it was so highly classified was because 
of the sources and methods, and I am a bit afraid to start trying 
to speculate about what I remember from them and what might 
still be classified or not. 

I am sure the Intelligence Committees have copies of that esti- 
mate, and I would really prefer if in some executive session or in 
some way, hopefully with the cooperation of the Director of Central 
Intelligence, they, or I in some fashion, could go over this in execu- 
tive session. I would need to refresh my recollection and also find 
out exactly what is classified in what way. 

Chairman Leach. Fair enough. 

Mr. Ermath. Mr. Chairman. 

Chairman Leach. One second, Mr. Ermath. 

One of the concerns as a committee is, we look at the problem 
of corruption abroad, how do you present shields to your own coun- 
try and have those shields work? And Mr. Ermath has asserted 
that he believes that there may have been monies that have seeped 
into the American political process. 



59 

And I would like to ask you, Mr. Ermath, if you could elaborate 
on that assertion. 

Mr. Ermarth. The Louchansky case is one of the more promi- 
nent that I know about in the public domain. It has just been re- 
ferred to in the press. In fact, most of the Louchansky story is in 
the public domain, because of press coverage in Europe and in the 
United States over the years. 

He was one of those operations that was set up in business by 
the KGB in the late 1980's that semiprivatized himself after the 
collapse of the Soviet order. The political contribution arose in 1993 
when he attended a fund-raiser in New York with an American 
friend, and the allegation was, he just wouldn't have been there if 
he hadn't made a contribution. 

Another case is Golden Ada, a company in San Francisco since 
dissolved and defunct, set up in the early 1990's to cut, polish and 
market Russian diamonds and other precious metals and stones, 
receiving hundreds of millions of dollars of diamonds and gold, 
platinum, which they just pocketed the proceeds; and they are 
known to have made political contributions in the San Francisco 
area. 

I simply cite those as attention-getting public cases. I would rest 
more on the direct assertions admittedly in private settings by col- 
leagues and the FBI who say, yes, it is happening at the Federal 
or at the State and local and probably at the Federal level as well, 
at least in the States where there is a substantial Russian business 
influence from offshore. There is no attempt here to impugn the 
honesty or patriotism of Russian-Americans who now live in this 
country in fairly substantial numbers, but it is money coming from 
offshore. 

Chairman Leach. Thank you. Does anyone else wish to comment 
on this subject? 

Mr. LaFalce. 

Mr. LaFalce. Mr. Brovkin, I just want to find out a bit more 
about the Transnational Crime and Corruption Center. Are you af- 
filiated with American University in some way? 

Mr. Brovkin. Yes. 

Mr. LaFalce. When did it come into existence? 

Mr. Brovkin. In the current form, it was founded in 1997. Before 
that it was a smaller program, a grant program funded by the Mac- 
Arthur Foundation. But the founding person is right here; it is 
Louise Shelley. I joined the crew in the fall of 1997. Before that, 
I taught at Harvard University in the Russian Research Center. 

Mr. LaFalce. Well, either of you can respond to my questions. 
You made reference to the studies that you did which were enabled 
by a Department of Justice grant. 

Can you expand upon this Department of Justice grant, please? 

Mr. Brovkin. Could I ask Louise Shelley to answer? 

Mr. LaFalce. Surely. 

Chairman Leach. If you would introduce yourself for the record. 

Ms. Shelley. I am Professor Shelley of American University. I 
am the Director of the Center for the Study of Transnational Crime 
and Corruption. The reason Professor Brovkin has asked me to 
comment on this is that I was the principal investigator on these 
proposals before Professor Brovkin arrived on the scene, and we 



60 

have been running projects in Russia and now in Ukraine with 
Russian colleagues and Ukrainian colleagues — in four cities in Rus- 
sia and one in Ukraine — to study problems of organized crime and 
corruption. 

With them we have worked with members of the Russian Par- 
liament and produced publications and seminars and training for 
law enforcement. 

Mr. LaFalce. Can we focus in on the Department of Justice 
grant, Ms. Shelley? 

Ms. Shelley. That is the Department of Justice grant. 

We also have a second grant 

Mr. LaFalce. You say that is. What is? 

Ms. Shelley. We have two grants from the Department of Jus- 
tice out of the Coordinator's Office administered by the Department 
of Justice on organized crime studies. 

Mr. LaFalce. Did they put out solicitations for these grants, re- 
quests for proposals? 

Ms. Shelley. Yes. 

Mr. LaFalce. When did they do this? 

Ms. Shelley. When this project first started — it was in 1995 — 
we received initial funding from the McArthur Foundation and 
some additional money from AID. That funding ran a total of a 
year. After that point, the FBI and the anti-corruption working 
group within the U.S. Embassy in Moscow began to participate in 
our programs and asked us to make a formal application for fund- 
ing to the Coordinator's Office at the Department of State for as- 
sistance to the former Soviet Union for a full-scale program in Rus- 
sia, at which point I developed such a proposal that went through 
appropriate committees, and it was then given to the Department 
of Justice to administer. So we have been receiving Department of 
Justice funding since 1997. 

Mr. LaFalce. 1997? How much is that for? 

Ms. Shelley. In this year, our funding — we are still operating 
our 1998 money — is approximately $300,000. We submitted all of 
these reports with our testimony. 

We also received funding — Dr. Brovkin and I wrote last year a 
proposal to international law enforcement at their request to study 
money laundering and front companies. That money from inter- 
national law enforcement at the State Department was transferred 
to the Department of Justice to administer, and we started working 
on that this spring. 

Mr. LaFalce. I am just wondering to what extent the Justice De- 
partment was involved in investigating whatever money laundering 
problems may have been in existence in connection with Russia, or 
corruption problems, at the time of their request for proposals and 
whether your work was enabling to them in carrying out and en- 
forcing the United States law? 

Ms. Shelley. We would certainly hope so. 

At other points. Professor Brovkin and I have given lectures in 
1999, to the strike forces on organized crime to help them under- 
stand these issues. We have sat with prosecutors and tried to bring 
the results of our research to bear. 

Mr. LaFalce. And you work with officials from the Treasury De- 
partment? Did you work at all with officials from the national regu- 



61 

latory agencies, whether it is the Federal Reserve or the OCC or 
the superintendent's office from the State of New York? 

Ms. Shelley. We have met on just one occasion with the Depart- 
ment of the Treasury. We have also met with top officials at the 
World Bank on these issues in the last year. But we have not had 
other contact than those. Our contacts have been primarily with 
the Justice Department on these issues. 

Mr. LaFalce. Did your studies investigate the nature of the pri- 
vatization process within Russia and the tremendous potential for 
either good or bad or exploitation of that process? 

Ms. Shelley. I have even testified before Congress many times 
on the misuse of privatization and the abuses that were committed 
in this process and gave lectures to the State Department and AID 
on this issue already four years ago. 

Mr. LaFalce. Would you give me the list of each of the occasions 
that you testified before Congress and each of the United States or 
international financial institutional entities that you have spoken 
before on this subject, please? 

Ms. Shelley. Yes. 

[The information can be found on page 261 in the appendix.] 

Mr. LaFalce. Thank you. 

Chairman Leach. Thank you, Mr. LaFalce. 

Mr. Bereuter. 

Mr. Bereuter. Thank you, Mr. Chairman. 

I want to say to the witnesses that I regret not hearing your oral 
testimony. To the extent that you have submitted written state- 
ments, I have read them in advance. 

I simply wanted to ask all of you, in order, if you can respond 
as directly as possible about what is, in your judgment, the pri- 
mary thing that we in the Congress, or the Government generally, 
can do to reduce money laundering activities from Russia that take 
place in this country, and including those that involve American fi- 
nancial institutions? 

Could I start with you. Director Woolsey? 

Mr. Woolsey. Yes, Congressman Bereuter. 

The money laundering itself is, from my point of view, a problem 
in two ways. One is what you mentioned, that it runs the risk with 
large deposits in this country of corrupting American institutions. 
And about that I have no specific learning or expertise. It is obvi- 
ously a very important issue and important to this committee. 

But from my background and perspective, one second very trou- 
bling aspect of it is that it is evidence of corruption in Russia which 
undermines the structure of the state. Sometimes it is hard to tell 
money that is simply being deposited here from money that is 
being laundered. Aiid although capital flight is a problem from 
Russia, the real problem, in the second sense that I was describing, 
seems to me to be that the laundering of it is evidence that particu- 
larly the privatization process in Russia was so corruptly handled 
that individual Russians have lost confidence with the stability of 
their state and of our involvement with it. 

I really think that the primary effort on that second problem 
ought to be best dealt with by a program something along the lines 
of what Congressman Weldon has proposed, which moves us in the 
direction of working with those honest institutions in Russia — and 



<;o.fifiQ on .'i 



62 

there are definitely some at the oblast and krai level — in the direc- 
tion of working together with proper Russian financial institutions 
on mortgages for home-owning and the like, so that ordinary Rus- 
sians see that American efforts are going to help them, rather than 
to being diverted into corrupt channels. That seems to me to be, 
again from the perspective of my background and interests and 
focus, a very, very major problem. It is the major difficulty that 
over the course of the last several years our policies have not fos- 
tered that. 

So I guess I will close with those two points. 

Mr. Bereuter. Thank you. 

Mr. Ermarth, would you comment on what is the most important 
thing we can do to stop money laundering in this country, whether 
or not it involves American institutions? 

Mr. Ermarth. Two things, sir. First, the mandate of this commit- 
tee directly to craft laws and regulations and institutional change 
that causes the regulation of our financial institutions to catch up 
with the globalization of everything. It is not just Russian money 
laundering. 

Second, to contribute to the larger debate in the Congress and in 
the public about Russian policy so that when and if a new window 
of opportunity for reform in Russia opens up we have the policies, 
the perspectives, the strategies ready to go, as it were, that can re- 
spond. Congressman Weldon has a list. Others have lists. In effect, 
it is an answer to Congressman Frank's question, what could we 
have done better? 

The alternatives were there in the past: more honesty, more 
transparency, more rigorous and thoughtful conditionality. It does 
not necessarily mean tighter, but about things that really matter 
like law and order, the courts, the civil code. And, finally, not so 
close in identification with certain individuals and a certain clan of 
politicians. 

Mr. Bereuter. Thank you. 

Mr. Saunders, would you respond, if you wish? 

Mr. Saunders. I don't have anything to add. I endorse the com- 
ments of both of the previous witnesses. 

Mr. Bereuter. Let me then get Professor Brovkin an oppor- 
tunity in my five-minute period. 

Mr. Brovkin. In addition to what has been said already, which 
I completely agree, I just simply want you to keep in mind when 
developing these transparency and honesty systems and legislation, 
to keep in mind that it is in the national interest of the United 
States to keep the goodwill of the Russian people which is now 
turning sour, and that Russian people, because of the failed re- 
forms, increasingly perceive the United States as the country that 
is partly responsible or guilty of the misery that they are in. They 
identify misery with capitalism, capitalism with failed democracy. 

I think it is extremely important to realize, before it is too late — 
and it could be too late at some time down the road — that you have 
got to change course and make sure that the Russian people under- 
stand that U.S. policy is for them, and not necessarily for whatever 
political leader happens to be there at the top. 

Mr. Bereuter. I understand. That is good advice. 

Thank you, Mr. Chairman. 



63 

Chairman Leach. Thank you, Doug. 

Mr. Frank. 

Mr. Frank. Mr. Brovkin, I, Uke Mr. Bereuter, have read the 
statements. I wasn't able to be here for them. 

You made reference to a fund-raiser in 1992 that a Mr. 
Louchansky gave money to. 

Did I hear that correctly? 

Mr. Ermarth. That is what has been reported. 

Mr. Frank. Whose fund-raiser? Who was the beneficiary? 

Mr. Ermarth. Democratic National Committee. 

Mr. Frank. In 1993? 

Mr. Ermarth. The man's name is spelled in a somewhat 
Frenchified, Frankified manner. L-O-U 

Mr. Frank. Let's stick with Frenchified. You can give that off of 
my minute. You can give that to the reporter off of my time. 

Mr. Ermarth. If you do an Internet run, you will get it all. 

Mr. Frank. Mr. Saunders, first, your criticisms of some of the 
kind of macro- and micro-economic policy I was pleased to hear, be- 
cause I think what we get here are the common themes — to some 
extent these are not Russian-specific, but IMF-specific. There is an 
underlying problem that many of us have had with an IMF imposi- 
tion, one of too much specificity and too much austerity. Professor 
Brovldn, you have summed what I have found to be the problem 
with that. 

We get this identification, because very often we are simulta- 
neously implementing IMF policies in newly democratizing coun- 
tries, and we give people this notion that austerity and democracy 
go together and that paying more for your food and paying more 
for necessities is somehow a consequence of democracy. 

I would say, Mr. Chairman, I said this to Mr. Summers before, 
it has relevance to a piece of legislation that we are going to deal 
with. I believe morally there is nothing more important for us than 
to pass the legislation dealing with the heavily indebted poor coun- 
tries. But I don't believe the votes are here in this House, nor 
should there be, to put that to the ESAF, to put that through the 
economic structural adjustment fund of the IMF for some of the 
kinds of reasons we have had here. 

But back now, if I could, to Mr. Saunders. As I said, I appreciate 
that, because I did want to say that in context. It is a problem of 
our Treasury and IMF and other treasuries in general. Part of the 
problem is — and maybe we ought to look at this, Mr. Chairman. 
We ought to maybe get the State Department and open entities 
into this. 

The problem is that increasingly in the world today foreign policy 
is heavily influenced by the World Bank and the IMF — I think the 
Bank has been much better than the IMF — and they are run by 
treasuries. There is a structural problem. The political element, the 
people who appreciate democracy, the people who appreciate some 
of these kinds of considerations are literally out of that loop. We 
have only the treasuries to the IMF and other financial institu- 
tions, and I think that should be looked at. 

Mr. Saunders, let me ask you just one question. You said that 
we made a mistake when v/e divided the Russians into the good 
guys and the bad guys. None of us have trouble thinking of good 



64 

guys who aren't such good guys, but I am wondering, who did we 
inappropriately characterize as bad guys to whom we should have 
been more neutral? Because I have a harder time coming up with 
that list. 

Mr. Saunders. I tried to answer that question earlier in my 
opening statement. I think one of the groups that was inappropri- 
ately characterized as "bad guys" was clearly the Russian Par- 
liament. They obtained this label, "Communist dominated," which 
ended up in virtually every speech or piece of press reporting on 
Russian political developments. I think that had a very negative 
impact. 

Mr. Frank. I think those two tie in, because that would be true 
of other parliaments in other countries, which is parliaments are 
necessarily, understandably, less inclined to raise food prices and 
cut unemployment benefits and throw people out of work. 

What we are really talking about is a conflict between financial 
orthodoxy and democracy. I guess those who have been unable to 
get the American Congress to do some of those things should not 
be surprised when the IMF is unable to get other parliaments to 
do it. 

The only other thing that I would have to say — and I must say, 
Mr. Saunders, in the statement, that I did read the statement, my 
guess is the State Department probably would be pointing with 
pride to your giving credit for successfully influencing Russian pol- 
icy with regards to Bosnia, Kosovo, Iran, and I would throw in 
NATO. I was wondering before about where the tradeoff would 
come, because you can't obviously — one other area — and I was won- 
dering if I read you correctly, because you also throw in here 
macro-economic policy. 

I gather your tradeoff would have been more sort of stricter legal 
regularity and less concern with both macro- and micro-economic 
policy, less fiscal regularity? 

Mr. Saunders. That is correct. I would also consider tradeoffs on 
some of the foreign policy issues, but that is probably not germane 
to this. 

Mr. Frank. Oh, yes, it is. Go ahead. 

Mr. Saunders. I think if we had tried to work earlier and more 
cooperatively with Russia and Yugoslavia, we might not have 
ended up having to lean quite so hard on them toward the end. 

Mr. Frank. I guess I didn't — I need more elaboration on that. I 
must say you could hear an enormous sigh of relief that almost 
raised the Capitol dome when the Russians threw in with us and 
helped bring about an end to the terrible time that we faced in 
Kosovo. Certainly any suggestion that that tradeoff should have 
been made we wouldn't argue. You are saying we could avoided 
that earlier on, but I would have to, since I have run out of time, 
close with just a skepticism about that without a chance to discuss 
it. 

Chairman Leach. Thank you. 

Mr. Royce. 

Mr. ROYCE. Mr. Woolsey, thanks for being here today. 

Five-and-a-half years ago, you appeared before the International 
Relations Committee. At that time, I asked you about the extent 
of the former Soviet KGB involvement in organized criminal activ- 



65 

ity in Russia, which was then becoming evident. Today, that prob- 
lem has mushroomed beyond Russia, becoming a transnational and 
international issue. 

The question that I would ask is, what is the extent of Russian 
internal security, electronics intelligence, and foreign intelligence 
agency operations against American banking interests, American 
banking and in business? One of the reasons that I ask that ques- 
tion is because a Russian external intelligence spokesman has said 
that they are focussing less on foreign ministries and defense and 
now more on foreign ministries of finance. If so, that means that 
the United States Treasury Department, the Federal Reserve, and 
the banking and financial systems are targets of Russian espio- 
nage. 

My question is, how much does the FBI know about Russian in- 
telligence against American banking and business and what is 
being done to alert those agencies and businesses to the problem, 
to help them counteract the problem and take countermeasures? 

The second question that I would ask is, if there were violations 
of U.S. and international law on the part of U.S. Government offi- 
cials with regard to U.S. financial aid to Russia, what is the appro- 
priate agency to investigate those violations? Would it be the Gen- 
eral Accounting Office, the FBI, the Justice Department, the Fed- 
eral Reserve? Which agencies would investigate the IMF? 

Should international investigating and forensic auditing compa- 
nies be used more aggressively to get to the bottom of the Russian 
corruption is another question, and how can we ensure against fu- 
ture looting of U.S. assistance? 

Mr. WOOLSEY. I will give a try to those. Congressman. 

First of all, let me say I am four-and-a-half years out of date with 
respect to any classified information on this, so what you are really 
getting from me is essentially the reactions of a rather careful 
newspaper reader. 

Also, with respect to the law enforcement questions, of course, 
our responsibility out at the CIA was, whenever any indication of 
a violation of law by an American citizen might have come across 
the screen as a result of foreign intelligence collection, to refer that 
to the Department of Justice and then get as far away from it as 
possible. The CIA doesn't look into matters that might involve 
lawbreaking by Americans. 

So for two reasons my knowledge is limited here. 

I have spent some time over the course of the last several years 
on a panel with Arnaud de Borchgrave and Frank Ciluffo, who will 
be testifying next, at the Center for Strategic and International 
Studies where we have looked into both Russian organized crime 
and cybercrime as well as a number of related issues. 

My judgment is that, with respect to your first question, the im- 
plication is quite correct that there has come to be a good deal of 
focus by combined efforts of Russian intelligence and Russian orga- 
nized crime interests on Western, and particularly American, fi- 
nancial institutions. But with respect to the scope as distinct from 
the direction, I don't have any specialized knowledge or judgment. 

I think that, as far as violations of the law by international fi- 
nancial institutions are concerned, in the first instance, if Amer- 
ican citizens have been involved in any such violations of law, that 



66 

should immediately go to the Justice Department and presumably 
the FBI. 

The international financial institution itself in its official capac- 
ity presents, of course, a very complicated question. Most of these 
institutions have immunity from prosecution or lawsuits in the 
United States for one reason or another. I have been involved in 
arbitrations against the United Nations as an institution, and cer- 
tainly we could handle something by arbitration there, because of 
the arbitration clause in the contract, but we could never have 
brought them into court. 

I think I will have to stop at that and suggest that, with respect 
to what the FBI knows or the violations of law by American citi- 
zens, that you need more specialized counsel on those subjects than 
my background is able to give you. 

Mr. ROYCE. I thank you, Mr. Woolsey, Mr. Chairman. 

Chairman Leach. Mr. Royce. 

Mr. Ryan. 

Mr. Ryan. Thank you. 

Dr. Brovkin, I was very taken by what you had said about the 
Russian people are losing faith in America and in American policy 
toward them, because their version of capitalism is this crony cap- 
italism that we talk about. 

Mr. Saunders, you mentioned that our American policy — our Fed- 
eral Government's policy has been, pick the good guys, pick the bad 
guys, and stick with the good guys regardless of whether or not we 
find out or determine that they are bad guys. 

This leads me to a question for you, Mr. Ermarth. In a recent 
article, I think it was in Insight magazine this week, you said that 
you felt pressure to whitewash intelligence reports about corrup- 
tion in Russia. And, further, career diplomats at the U.S. Embassy 
in Russia confirmed your statements; and the article discussed a 
top secret 1995 CIA report on Chernomyrdin and other Russian 
leaders that elaborated on their affiliation with corrupt activities 
and organized criminal figures. 

How did the White House and the Vice President's office receive 
this report? What was the reaction to the allegations of corrupt ac- 
tivities to the so-called good guys? 

Mr. Ermarth. Mr. Congressman, I have never written anj^thing 
for Insight magazine, so they must have been quoting me from 
something else. 

Mr. Ryan. It was a quote — let me — it may have been from 
that 

Mr. Ermarth. in the national interests. 

In the article that I did write, I alluded to a variety of problems 
we had in dealing with Russian organized crime, corruption and of- 
ficial corruption, high-level kind of corruption. 

There was some pressure because, in a variety of mostly subtle 
ways the people who made policy on Russia, the Administration 
made it clear they didn't want to hear much about that, at least 
allegations of high-level corruption. 

I wasn't in the line of fire directly. I got most of this from the 
analysts who were. They came back from the meetings and told me 
about it because I was taking an interest in this almost as a case 
study in post-Cold War problems. We have had so many faces to 



67 

it, nuclear proliferation, almost — it was crime. It was KGB intel- 
ligence. It was politics. It was business. It was banking. It is for- 
eign affairs, even, because it affected our diplomacy. A lot of these 
people had Israeli citizenship and so forth. 

So I was watching how this evolved. And the analysts had a lot 
of problems, because of the political distaste for what they had to 
say, partly because they couldn't bring all of the different pictures 
and pieces of the picture together, partly because economists didn't 
know how to deal with corruption and crime as an analytical prob- 
lem. So there was a lot of problems. 

It was in this context that a story arose and a report went down 
to the White House to Vice President Gore's office, and he came 
back with the so-called barnyard epithet. 

I will tell you, as an intelligence officer, you have got to make 
judgments about the truth or falsity of what you hear. I heard it 
from so many people that I think it is true. I never saw it, however. 
And now they can't find it. 

Mr. Ryan. Are you saying 

Mr. Ermarth. It is a bit of a symbol of the problem for which 
there is a lot more 

Mr. Weldon. If the gentleman would yield, I would not nec- 
essarily put you in the position of stating that barnyard epithet, 
but would you characterize the tone of the barnyard epithet in 
terms of what it meant to the report? 

Mr. Ermarth. Yes. It was quite clearly dismissive of what was 
in the report. But there again, I just heard it so often that I be- 
lieved it was true. But that was not the basis for my belief that 
there was a resistance to this from policymakers. 

Mr. Ryan. So what you saw in the intelligence community was 
a shift from the White House and policymakers from deep analysis, 
objective analysis to one of more agenda-driven analysis on intel- 
ligence reports? 

Mr. Ermarth. I found that to be the case across the board. Re- 
member, this was a period in which two contradictory things were 
happening. On the one hand, the topic, the agenda of intelligence 
was spreading out over a lot of issues, not anew, but new priorities, 
and all of them quite difficult and demanding of manpower in the 
field for collection and at home for analysis. At the same time, 
there was downsizing of the work force. And you throw on top of 
that the fact that Russia was kind of unfashionable in the early 
1990's because it was redolent of the Cold War, and there were all 
of these other things to put people onto. Yes, there was a shrinkage 
of the resources for deep analysis. Some people pretended the in- 
box 

Mr. Ryan. I guess my final question, seeing that the red light is 
about to go on, is why — I would like to ask all of the panelists 
this — why this shift in intelligence attitude? 

It is understandable that we don't want to do things that drive 
nationalization in Russia, that we don't want to push them away 
from freedom and democracy and capitalism, that we want to go 
down the road. But it seems as though the attitude from the Ad- 
ministration has been one of receiving intelligence reports that are 
more preferable to the political agenda than receiving intelligence 
reports that are more factual or accurate. Why is that? I would just 



68 

like to see if anybody would care to answer that question, what 
your opinion would be. 

Mr. WOOLSEY. Congressman, I will take a stab at that. 

I have always said that the principal qualification of Director of 
Central Intelligence is that you don't want anyone on the job who 
wants too much to be liked, because you are always, if you are 
doing your job right, the skunk at the garden party. You are not 
a participant in the policy process directly. I think you should not 
be if you are doing the job right. You should not be making policy 
recommendations, because then the other players. State, Defense, 
and so forth, will believe that you are skewing what you estimate 
in the direction of supporting your own policies. You are the only 
person at the table who should, I think, have no stake in the policy 
outcome. Just call it like you see it. Sometimes you are right. 
Sometimes you are wrong. 

During the first two years of the Administration when I was the 
DCI, we did have the phenomenon that Fritz describes of declining 
resources and a need to focus a great deal on the newer issues. But 
I felt one of the newer issues we were focusing on and, as I said 
in my testimony, I did not detect any lack of interest in it or subtle 
signals to turn away from it, was Russian organized crime. 

I would not say the same of some other questions. There were, 
for example, a number of times which I forwarded or made assess- 
ments about what was going on in Haiti, that I felt there was a 
great deal of body language in other parts of the Administration 
showing a not wanting to hear what the CIA had to say, or I had 
to say. I did not feel that way as of early January, 1995, about Rus- 
sian organized crime. 

But Fritz was in the agency longer than I. I have known him a 
long time and value his judgments and views very highly. I would 
certainly not dispute his judgments about what things looked like 
during the entire time he was there. 

Mr. Ermarth. I would only add that while there were problems, 
and I described them in that article and tried to summarize, I 
think it is very important for people like the Members of this com- 
mittee and other committees to understand that intelligence prob- 
lems attending to all of this — and it had less to do, by the way, of 
organized crime where there were no political pressures than the 
high end, the authorized crime, the big shots who were corrupt and 
the notion that maybe these reforms were not all they were 
cranked up to be. That our leadership did have a problem with. 

But this was secondary because, like I said earlier, the facts and 
very sophisticated interpretations of what was going on in Russia, 
the truth was amply in the public domain, in the Russian press, 
in Western analysis. In fact, I would say that after 1996 when he 
founded this little news service, David Johnson called — his product 
is Johnson's Russia List. If you are interested in Russia and you 
are prepared to spend half-an-hour a day and only read English, 
you have absolutely no excuse, from 1996, to be in the dark about 
any of this. 

Mr. WooLSEY. Mr. Chairman, could I add one more point? It is 
important to get the sequence of events straight here. 

The privatization of the program with the vouchers was taking 
place, I think, for instance, in 1994. So that did result in a number 



69 

of institutions and old-line Communist managers of factories and 
the like being able to buy up people's vouchers very cheaply and 
to get control of things. That was understood and reported very 
clearly. 

The now highly discredited loans-for-shares program, which Mr. 
Chubais operated, was really after that. I think it took place in 
1995 or 1996. That probably began the time in which you began 
to see, at least from my reading of the press during the time after 
I left the Government, strong suspicions of involvement of very 
high-level people in what would be in this country corrupt behavior 
and was morally corrupt in Russia, even if it perhaps didn't violate 
the laws that were on the books. 

So there is a time sequence here. I would say 1995-1996 was 
probably the period in which — again, from my reading of the 
press — it looks as if people's attention started to turn to high-level 
corruption and may well coincide with some of the reactions that 
Fritz is describing. 

Mr. Ryan. Any others wish to comment on that? 

Mr. Brovkin. I would just say, in addition to what has been said, 
is that Secretary Summers referred this morning about a too fast 
or too slow approach. The fact is, it is not a matter of too slow or 
too fast, but differently. 

What we have just heard is exactly the process. They first vouch 
organizations, they then fake elections, and then the rise of the 
oligarchs who finance the ultimate selection campaign. Then the 
reports that some violations may have been committed during the 
elections campaign. The United States Administration looks the 
other way. Then there are more and more examples, both from the 
political and economics sphere, that the Administration looks the 
other way. As a result, things get bigger. 

If companies make more and more money on GTOs, you look at 
the progress of the banks. It is public information on the Internet. 
You look from year to year after year how the twelve major Rus- 
sian banks were expanding at the time when the economy was col- 
lapsing. That is amazing, that is an absolute miracle that Russian 
banks were expanding in 1996, 1997, 1998. How could they pos- 
sibly be making so much money when the economy was shrinking? 
That is the question that needs to be answered by this committee. 

Mr. Ryan. Very insightful, thank you. 

Thank you, Mr. Chairman. 

Chairman Leach. Mrs. Jones. 

Mrs. Jones. Thank you, Mr. Chairman. 

Would you pronounce your name for me, sir, in the burgundy 
jacket, please? 

Mr. Brovkin. Professor Brovkin. 

Mrs. Jones. Let's continue that. How could they grow? How 
could those banks grow when the economy was falling apart? Spec- 
ulate for me. 

Mr. Brovkin. Primarily due to the high-interest GTO market. 
GTO stands for government short-term obligation. It is a domestic 
debt. So the way it was functioning was that the Russian govern- 
ment had a deficit in the budget. They couldn't pay the wages. 
They couldn't pay the pensioners. They couldn't pay their soldiers. 
The reason they couldn't pay that was nothing was working. 



70 

So the correct approach, not the one we had this morning, would 
have been to start by getting Russian people to work. Even if it is 
not profitable, get them to work. Get small businesses going. I call 
it in one of my articles the same approach that was taken in Ger- 
many in 1946. You don't start with privatizing the banks. You start 
with getting local bakeries and local businesses going and making 
sure that the local mafia does not control them, that there is law 
enforcement, that there is observance at least of the Soviet laws. 

None of that was done. Instead, the Administration encouraged 
Mr. Chubais and others to create the securities markets. How can 
there be a securities market when there is no industry? 

Mrs. Jones. Thank you. Let me ask another question. Thank 
you. 

Now, this is, from your perspective, not being a part of the Ad- 
ministration; is that correct? 

Mr. Brovkin. That is correct. 

Mrs. Jones. And not knowing all that the Administration knew; 
is that correct? 

Mr. Brovkin. That is correct. 

Mrs. Jones. So you sit here on this panel, based on your experi- 
ence outside of a responsibility as administrator of a Government 
like the United States. And you are not alleging in your statement 
any wrongdoing, criminal wrongdoing on the part of the Adminis- 
tration based on this situation, correct? 

Mr. Brovkin. No. 

Mrs. Jones. Thank you. I want to ask someone else another 
question. Thank you very much. 

It is kind of hard when you are a less senior person on the com- 
mittee, you get way in the corner over here. 

Mr. Ermarth, I want to ask you a question. Thanks. 

You were saying there was a shift and a deep analysis, and that 
shift and deep analysis arose, am I correct, as a result of a lack 
of enough people or staffing to be able to do a deep analysis? Is 
that what you said? 

Mr. Ermarth. No, ma'am. That is not the only cause. 

Mrs. Jones. But you did say that earlier? 

Mr. Ermarth. It appeared in this article, '*Why Did We Under- 
achieve Out at the CIA?" I wrote a little article about that. That 
was one of the factors. 

Mrs. Jones. So was it a minor or major factor? 

Mr. Ermarth. This lack of deep analysis? It was a major factor 
in our 

Mrs. Jones. It was a lack of deep analysis that arose as a result 
of a lack of staff. 

Mr. Ermarth. That was part of it. Also, it got unfashionable. 

Mrs. Jones. Now, when you say "unfashionable," would you be 
a little more clear with that for me, please? 

Mr. Ermarth. The management of the agency in which I was a 
part for a good many years found, particularly in the 1980's, that 
a lot of our old products, big heavy analyses of what the Russian 
military forces, the Soviet military forces, they did not help the cus- 
tomer very much, the policymaker very much. He wanted more 
operational near term: What do I do tomorrow? How do I han- 
dle 



71 

Mrs. Jones. When you say "he", would you be more clear on who 
"he" is? 

Mr. Ermarth. The customer for intelligence throughout the Ex- 
ecutive Branch. 

Mr. Ryan. If the gentlewoman would yield. 

Mrs. Jones. I don't know if I want to, but I will. 

Mr. Ryan. Thank you, Stephanie. 

I just wanted to — because I brought this up with Mr. Ermarth's 
quote — I just want to read you a quote and see if you still agree. 

Mrs. Jones. Why don't you let me finish and then can you deal 
with that? Go ahead. 

Mr. Ermarth. So there was an effort made to encourage analysts 
in all areas, Latin America, Africa, Middle East and Russia, to 
write things that are more current, that have a more immediate 
relevance to what the policymakers are doing. 

OK, please the customer. So the business got more retail, if you 
will, to the point where sometimes we began to say, '*Well, we are 
just Kentucky-fried intelligence." Where is the depth? There was a 
sacrifice there, because it takes a lot of deep investment to, for ex- 
ample, meet military intelligence requirements, make sure your 
maps are up to date, for example. 

Mrs. Jones. But as a policjonaker, you are an analyst. As a pol- 
icjrmaker, sometimes you have to make that decision, where are 
you going to put the most, the best of your troops, right? 

Mr. Ermarth. That is right. 

Mrs. Jones. Sometimes you make the decision based on all that 
is in front of you at that juncture. As an analyst, not being the pol- 
icjmiaker, you could not necessarily say that that was a bad deci- 
sion to be made based on all of that you had in front of you in light 
of the fact that you didn't know everjrthing? Yes or no? 

Mr. Ermarth. No. The analysts usually know more than the pol- 
icymakers. 

Mrs. Jones. That is because you are an analyst. 

Mr. Ermarth. I have been both. 

Mrs. Jones. Based on what we are talking about, it was your 
opinion after the analysis that you knew more than the policy- 
makers and that is why you make the statements that you made 
today. 

Mr. Ermarth. Yes. 

Mrs. Jones. OK. I am done. 

Mr. Ryan. I just wanted to clear this up, because it is a very 
worthwhile point. I think it goes beyond whether there were staff- 
ing cutbacks or something like that, the shift in intelligence. I just 
wanted to read one of your quotes and see if you could just confirm 
this. 

That, "deep analysis — intelligence reports with regard to Russia 
deteriorated from deep analysis toward an agenda," where you de- 
scribed, "supportive of daily business, our policymakers did not 
want, and our intelligence analysts had little incentive to provide, 
a big picture of long-term assessment of Russian realities. They 
mainly wanted to get to the next Chernomyrdin meeting or the 
next quarrel about Russian missile dealings with Iran." 

It sounds as if there was a shift in attitude for what you were 
sending them. Is that correct? 



72 

Do you still agree with these quotes? 

Mr. Ermarth. I agree with them, but I would not say it is a shift 
in attitude. If you will, it is a shift in business style. It had con- 
sequences, and they were costly. 

And, by the way, management at the agency has recognized that 
and tried to counteract that within the resource constraints that 
they have. You can't have current intelligence that is meaningful 
unless you do deep analysis to back it up. That applies to very 
mundane things like maps and order of battle and economic data. 

Mr. Ryan. Very fair point. 

Mr. WOOLSEY. I have one sentence on this, if I may. 

That tension existed — exists all the time. I agree with the con- 
cerns that Fritz expressed about the direction and the pressure. 
But in 1993, 1994, we felt that the work that we were doing on 
Russian organized crime was precisely a good example of the in- 
depth, long-term analysis. This was a very fine piece of work by 
young analysts out of the agency that I took around to very senior 
people in the U.S. Government and in other governments, because 
it was so thorough and in-depth. 

So it is not a simple picture, but I don't dispute what Fritz said 
about what happened in 1995 and 1996. 

Chairman Leach. Thank you. 

Mr. Lazio. 

Mr. Lazio. Thank you, Mr. Chairman. 

I think that we are left with a fairly sobering picture here of a 
strategic relationship, a bilateral, strategic relationship that has 
largely deteriorated since 1993, no progress really in terms of arms 
control, divestment estimates from $100 billion to $150 billion to 
maybe twice that amount in terms of net numbers. You have a po- 
litical leap in Russia that seems to seek to undermine American in- 
terests, and then you have, as Professor Brovkin has noted, popu- 
lar sentiment turning against America as the so-called reforms 
have had sort of a perverse impact on the quality of life and pur- 
chasing power for people. 

I want to get back to sort of these turning points, because it 
seems as though around this 1993 point that we began this down- 
ward spiral, and it coincides to some extent — I would like to hear 
from the panelists — with the Chubais loans-for-shares program, 
and the relationship between the Treasury Department, the Ad- 
ministration, the Harvard Institute, and this privatization issue, 
how we went about it, b3T5assing public bidding proposals. And it 
seems as though the net result was a concentration of great wealth 
in the hands of the few, a sort of economic oligarchy. 

I want to begin with Professor Brovkin, if he could respond to 
that assessment and whether he agrees with that or not and re- 
spond to it and any of the other panelists that would like to add 
in. 

Mr. Brovkin. Yes, I do agree with what you just said. 

I should add that in the next issue of the journal 
Demokratizatsiya we are running — and we are showing the edi- 
tors — we are running an article by Janine Wedel exactly on this 
subject, on the kind of nexus political between the Chubais clan, 
as she calls it, and several people in Washington, and the way they 
have shaped U.S. policy to Russia and designed the privatization 



73 

program which in many ways — it is not only her opinion, but mine 
and many, many other people believe set in motion the process of 
crooked privatization, the rise of the oligarchs, the rise of the orga- 
nized crime and, of course, money laundering. 

So, in many ways, the crucial decisions were indeed made in 
1994, 1995, and the loans-for-shares scandal was the first actual 
scandal. It was the first time it became apparent that something 
terribly wrong was happening. 

I do believe and I do support the view that a large share of the 
responsibility lies with those on this side who either didn't under- 
stand — I grant them the benefit of the doubt. They just made a 
mistake or they knew that something was happening and they just 
looked the other way or, even worse, benefited from the kind of 
processes that went further. 

Mr. Lazio. Anybody else want to respond? 

Mr. WpOLSEY. I will add. Congressman Lazio, I do think the 
loans-for-shares program was something of a tipping point. Clearly, 
many of the problems that Russia was facing in all of the ways 
that we were describing were incipient up until that point. But the 
extraordinary buy-off of the companies for very small amounts of 
money and the aggrandizement of some of these individuals 
through that loans-for-shares program was the point at which I 
think it all sort of came together, and it has been downhill ever 
since. 

If there is no single event, there is no single thing that was abso- 
lutely decisive. But if you are looking for a point in which I think 
everybody who was watching this either said or should have said, 
this is all starting to go really bad now, it would have been 

Mr. Lazio. Sort of a national pilfering. 

Could you comment on the Harvard Management Company's 
participation in that? 

Mr. WOOLSEY. That all occurred after I left Government. I just 
read the newspapers on that. I don't really have any substantial 
views on that. 

Mr. Lazio. That raises some fairly extraordinary questions in 
terms of insider dealings and who was profiting from this. 

Let me ask you, if I can. Director, about Louchansky and his re- 
lationship with the DNC. And if there were Republicans involved, 
I would like to hear about that as well. 

Mr. WoOLSEY. The only thing that I can think that I can say 
publicly about this — and just about all I remember from this as- 
sessment of several years ago — is the sequence of events I believe 
was that Mr. Louchansky was invited to a fund-raiser in New York 
by an American citizen. He apparently had his picture taken with 
President Clinton. That picture appeared in a Russian publication. 
When we first saw it, we thought it was a forgery. But it turned 
out it was not. 

Mr. Lazio. There is much that we find out that we think is unbe- 
lievable. 

Mr. WoOLSEY. Lots of people get their hands shaken at fund- 
raisers and apparently his was. 

Then a couple of years later, even though there had been a good 
deal of attention paid to Mr. Louchansky at the top levels of the 
Government as a result of our reports, he was apparently invited 



74 

by the DNC to another fund-raiser in his own right, and then the 
State Department did not give him a visa. Somehow it had filtered 
through the system. I don't know exactly what happened. That was 
aifter I left the Government, but those are the bare facts as I be- 
lieve them to be the case based on public reports and what we 
knew at the time. More than that, what money went from anyone 
to anyone, if any money went from anyone to anyone, I don't know. 

Mr. Lazio. Does anybody have any information on this? 

Mr. Ermarth. If you are interested in Mr. Louchansky, includ- 
ing, by the way, his denials of any wrongdoing, any organized 
crime, any smuggling, money laundering, just get one of your staff- 
ers to do a search on the Web and you will get more than you ever 
want to read about Mr. Louchansky. 

Mr. Lazio. Thank you, Mr. Chairman. 

Chairman Leach. Mr. LaFalce. 

Mr. LaFalce. I really can't address the specifics of any particu- 
lar fund-raiser or any particular photo. It is just interesting to note 
that I have received invitations to fund-raisers for Governor Bush, 
Senator Dole. Somehow I got on some list. I can't begin to count 
the number of people that I have had my pictures taken with, with 
a handshake, and I am unaware of who they are. I just wanted to 
point that out. This is a fact of life, and the more prominent you 
become the more frequently this happens. 

Mr. Woolsey, when did you leave the CIA? 

Mr. Woolsey. The second week of January of 1995. 

Mr. LaFalce. So you were there until January of 1995. 

Mr. Ermarth, when did you leave the CIA? 

Mr. Ermarth. I retired on October 1, 1998. 

Mr. LaFalce. OK. Now, in my prior life when I was Chairman 
of the Small Business Committee, I did a lot of things. For exam- 
ple, when I went to some of the Central European countries in Jan- 
uary of 1990, I came back and we created legislatively the Central 
European Small Business Commission. The whole purpose of that 
was to develop a small business sector in those formerly centrally 
planned economies. 

I think it was very successful for the funding that we were able 
to achieve. Unfortunately, 0MB came in and said we were just 
going to have to eliminate that. That was very unfortunate, be- 
cause I saw the importance of it. 

I also saw what I thought was the most important phenomenon 
in the world at that time and that was the phenomenon of privat- 
ization and that we were in this critical juncture in the world 
where we would either do it right or do it wrong and we would 
have far reaching consequences on account of that. So I had hear- 
ings in my Small Business Committee, a number of them in early 
1994. 

I said it would be terrible if we measured the success of the pri- 
vatization program by the number of privatizations similar to the 
area — savings and loan subsequent to FIREA. We measured the 
success of the approach to deal with this problem by the number 
of institutions that we closed, which was the worst possible meas- 
ure. I said the success of privatization should be measured by the 
way in which societal wealth is being distributed and whether or 
not we were building up a small or medium-sized sector. 



75 

Were there any studies within CIA, any reports within CIA 
about the phenomenon of privatization, about the pitfalls of privat- 
ization, about the potential of privatization, either in the abstract 
or in the concrete? In the concrete more specifically with respect to 
Russia, either by the end of 1995 or — in your case, Mr. Woolsey — 
or, in your case, Mr. Ermarth, by the end of October of 1998? 

Mr. Woolsey. Again, Congressman, I resigned in early January 
of 1995. 

Mr. LaFalce. That is what I was referring to. 

Mr. Woolsey. I recall more than one assessment, critical assess- 
ments of the way that the voucher privatization program had been 
going and the problems with it. I don't recall a single long study 
or detailed study of the sort that I described about the 1993 work 
on Russian organized crime. 

Mr. LaFalce. The difficulty that I had was I couldn't get any- 
body to pay attention to the quality of privatization, and I am talk- 
ing about with any international financial institution. I went to 
London to talk with the head of the European bank and reconstruc- 
tion development about Russia and other programs and whether or 
not we were doing it right, and so forth. I was unaware the CIA 
really was that concerned at all. 

Mr. Woolsey. I recall several items that the voucher program 
was not — items that said the voucher program was producing a 
much greater concentration of wealth. People's assets were being 
bought up very cheaply. It was not being spread around in society, 
the ownership shares 

Mr. LaFalce. I had testimony in my early 1994 hearings that 
privatization was the way for the wealth to be stolen from the 
State into the hands of either the patrons or no one was sure. This 
was not — and there was article after article. This was not some- 
thing that was secret. 

Mr. Woolsey. I think that we are starting to see that with re- 
spect to those vouchers in 1994 and by early 1995 when I left. And 
I think if I can just say, I think your concern about the procedures 
and the fairness and the quality is exactly on the mark. One of the 
things that has gone badly wrong here is that all of us in different 
professions have our blinders. Certainly, my profession of the law 
has its. But sometimes economists and financial people assume 
that a rule of law is going to apply and all they really need to do 
is look at the economics in some theoretical way. 

That was, I think, the wrong approach in our attitude toward 
Russian privatization. I think that what you suggested about the 
quality of the privatization was exactly the approach that people 
should have been focussed on. 

Mr. LaFalce. That is hindsight. I was wondering if at the time 
the CIA was making any reports on this to the Administration, to 
anybody else, with a call for action, with a call for remedial policy 
and strategy, and so forth? 

Mr. Woolsey. Reports to some extent I do recall. The Intel- 
ligence Committees would be able to tell you in more detail. I don't 
recall a single major detailed study, as I said, of the sort we had 
on Russian organized crime. But as far as a call to action, no, we 
would not have done that. We would not make a policy rec- 
ommendation. We would not have done that. 



76 

Mr. LaFalce. Mr. Ermarth. 

Mr. Ermarth. I had the same reaction in the early 1990's as you 
had, Mr. LaFalce. I don't recall a specific report on privatization, 
per se, but there were many reports on how the economic reforms 
were going, and they all contained observations, data assertions 
about the extent of privatization. Thirty percent of industry 

Mr. LaFalce. I was wondering about the utility of the work that 
the CIA does, if I could just explain what I mean by that state- 
ment. 

It is one thing to come up with a fact. It is another thing to come 
up with an interpretation of those facts and recommendations 
based upon those interpretations. I am just wondering if you saw, 
knew what was going on, but you didn't pull it all together and 
press the case, make specific recommendations. 

Mr. WOOLSEY. Recommendations we would have not done, would 
not press the case, would not call for action. 

Mr. LaFalce. Was that inappropriate for CIA? 

Mr. WooLSEY. I believe so. That was my understanding with 
President Clinton, when I took the job, that I would not make pol- 
icy recommendations. We resolutely refrained from making policy 
recommendations while I was there. 

Mr. LaFalce. What about some overall study, exposition of the 
nature of the problem? 

Mr. Ermarth. I found the same problem you did. The quality of 
the privatization was not being assessed and challenged properly. 

When they said, "OK, 40 percent are privatized," I would go 
around to the analyst and say, "Look, we know that privatization 
is a strange thing in Russia. Some state industries act like private 
ones." In other words, they are looking for new customers, they are 
looking for revenue, they are looking to improve their product. 

On the other hand, some privatized ones are acting like state 
ones. They are looking for subsidies, they are looking for protection. 
Don't you go out and try to tell the difference, the quality of privat- 
ization, exactly as you put it, the quality of management and the 
broader impact on the economy of that quality. 

They said, "No, we haven't got the resources." You have got to 
do that almost door-to-door. 

Mr. LaFalce. Thank you, Mr. Chairman. 

Chairman Leach. Mr. Bentsen. 

Mr. Bentsen. Thank you, Mr. Chairman. I apologize first of all 
to the witnesses for not being here for your testimony. I had to 
take care of some meetings in my office. 

I have had a chance to go through some of the testimony, and 
I guess what I would ask is while Russia has progressed far less 
than any of us would like to have seen, it seems to me that it is 
hard to determine what would have been a more appropriate strat- 
egy going forward. Mr. Woolsey in his testimony states that if you 
are engaged in dealing with Russia at the time, both from Adminis- 
tration and IMF policy, at each instance you would probably have 
taken the steps. When you stand back you might say why are we 
doing this? But the problem — weren't we in a period, one, where 
you see the collapse of the Soviet Union; the new Russian federa- 
tion under Yeltsin with a government that we don't know whether 
or not is going to survive for a day, a week, or a year just from 



77 

a force standpoint, let alone an economic standpoint. We don't 
know what direction they are going to go in. We have numerous 
strategic concerns, not to mention economic concerns. You go from 
that period forward to where you are trying to build some stability 
in the mid-1990's, and that carries you up to 1998 where you have 
a complete collapse, a near complete collapse of the Russian econ- 
omy, just as we had seen in other emerging markets, and I would 
argue that there is not a lot of difference between the problems 
that we have seen in other emerging markets. Even if we could 
step back now and in hindsight say we would have done things dif- 
ferently, I am not sure that I see or have heard today what we 
would have done differently. I don't think anyone here has advo- 
cated that we would not have engaged the Russians and I don't 
think that the Administration has also explicitly advocated that 
yes we know that there is corruption, but that is the only choice 
we have. I don't know that I have seen anywhere where the Ad- 
ministration has explicitly said that corruption in Russia is accept- 
able in order to get to the end. Has anybody been able to document 
that? 

Mr. WOOLSEY. No, I don't recall hearing an Administration wit- 
ness say that, Congressman. I will try to deal with the question, 
if you want. 

Mr. Bentsen. Sure. 

Mr. WoOLSEY. I think it is unfair to look back with 20/20 hind- 
sight and engage in complete Monday morning quarterbacking and 
say that the Bush Administration in its last year or the Clinton 
Administration right at the beginning of the Administration should 
have done all of the things that some of us up here now are sug- 
gesting would have been good ideas. I don't think that is fair. Pol- 
icy-making is an uncertain situation and this was a highly com- 
plicated and difficult set of circumstances that both the Bush Ad- 
ministration in its last year and the Clinton Administration, when 
it came in, met. 

I would say this. That by the time of the loans-for-shares pro- 
gram in 1995, there should have been, I think, a good deal more 
alarm bells going off than appeared to have gone off. And second, 
by around the time of 1996-1997, I think that a different approach 
somewhat along the line of what Congressman Weldon has sug- 
gested should have commended itself to many of the decision-mak- 
ers involved. That would not have been a disengagement from Rus- 
sia. It would have been far more focused on working with individ- 
ual Russians, on monitoring the money and the like. Just a little 
over a year ago, the IMF granted over a $22 billion loan to the 
Russian government on Mr. Chubais' assurances, and he later said 
publicly that he conned — the thrust was that he conned — the U.S. 
Government into moving this way. At some point in there, the 
1996-1997-1998 timeframe, it seems to me, even as I try to avoid 
being hypercritical with 20/20 hindsight, that some different shift 
in emphasis in the way we engaged with Russia should have com- 
mended itself to people. 

Mr. Bentsen. For the record, of the $22 billion the outstanding 
IMF debt to Russia is not that high at this point in time. I think 
it is in the range of $17 billion and the tranches were stopped over 
that period of time and in fact new IMF policy, as has been stated 



78 

today, is quite severe in terms of both the type of currency that is 
lent and how the funding is done. 

Let me ask you this and particularly Mr. Saunders and Mr. 
Brovkin. 

I am a graduate of American University and so I am glad to see 
that you are here today, perhaps not well trained, but nonetheless, 
can you tell me of a similar situation in history where you have 
had a country that is trying to make the transition the same as 
Russia is? It seems to me that you cannot compare Russia with 
other former Eastern Bloc nations. There is not the history or the 
economic history as you would have, say in Poland, or the Czech 
Republic? Is it fairer to state that Russia in many respects went 
from almost a near feudal system into its experiment — failed exper- 
iment I would add — in Marxism and a centralist planned economy, 
and then is thrown into capitalism. Is there a similar situation in 
economic history and are there any parallels? 

Mr. Saunders. There is no question that the transformation un- 
derway now in Russia is historically unprecedented. I would return 
to a theme that I was discussing earlier, however, and add that 
precisely because it is a historically unprecedented transformation, 
it was remarkably arrogant of the United States to believe that we 
could go to Russia with a set of very specific policy prescriptions 
and recommendations, telling them what the budget deficit should 
be or the inflation level should be. In the context of this amazing 
transformation, I can't understand how people felt that we knew 
enough ourselves in this country to try to give that kind of advice. 
So I agree that it was an unprecedented situation, but I would say 
that it was all the more reason to be very cautious in our approach. 

Mr. Bentsen. Do you not concur — some of my colleagues argue 
that the U.S. through the IMF was not requesting a sufficient level 
of conditionality in terms of making loans. You argue the reverse, 
that the U.S. was trying to impose too much structure? 

Mr. Saunders. I think the conditionality should have taken a 
different form. In the early 1990's, some people, including former 
President Richard Nixon, proposed that assistance to Russia be or- 
ganized not through the IMF, but through G-7 precisely to avoid 
the problem of the IMF and financial bureaucrats coming up with 
these various economic targets and ignoring the broader political 
issues in Russia. There definitely should have been very strict con- 
ditionality, but it should have been conditionality based on the rule 
of law and the development of a legal system that would promote 
investment. This could have prevented much of the corruption and 
capital flight we now see. 

Mr. Bentsen. Do you think that U.S. policy, which is fairly domi- 
nant in IMF activities I would argue with respect to Russia — has 
been silent with respect to establishing a rule of law or civil justice 
system? 

Mr. Saunders. Certainly not. But, at the same time, the Admin- 
istration has clearly given greater priority to privatization, for ex- 
ample, to privatizing 70 percent of enterprises or some other num- 
ber, than it has given to getting laws through the Duma. And, be- 
cause the Administration and the IMF were pushing President 
Yeltsin to implement these economic policies, he was not able to 



79 

work with the Duma to get other things. That is where our poUcy 
fell apart. 

Mr. Brovkin. Your question implies that since Russia had this 
unique historic situation, nothing could have been done and only 
in retrospect we could speculate what could have been done better. 
I want to remind you of a historical fact. In 1991 when communism 
collapsed, there was tremendous upsurge in entrepreneurship in 
Russia. Farmers were appearing. Small businesses set up. Instead 
of supporting the small businesses, and Russia had this experience 
in NEP, New Epidemic Policy, and I wrote a book about it, and I 
referred to Germany in 1946. Instead of that, there was this focus 
on achieving targets of privatization. That was the stated policy. 
Instead of supporting privatization, competition, rule of law and 
guarantee from local mafias so they don't grow up to become 
transnational mafias, none of this was done. Instead, there were 
targets on privatization and lectures here in Washington all over 
town how privatized Russian economy was, how great the capital 
society has been created. This was a wrong approach. Not too fast, 
not too slow, wrong approach. 

Mr. Bentsen. Thank you. 

Chairman Leach. Mr. Weldon. 

Mr. Weldon of Pennsylvania. Thank you, Mr. Chairman. I 
have two points that I want to make, and thank the witnesses for 
their excellent testimony. 

First of all here is the problem. If you are a Russian citizen who 
for seventy years was dominated by centrally controlled com- 
munism, you were looking forward to the day when communism 
was thrown off and a democracy would give you the benefits of 
what we have in America. That day came and went. 

I was in Moscow a year ago in January with the Duma at a con- 
ference on the Western nations to find out why more Western in- 
vestment wasn't going into Russia, and I had to give the sad statis- 
tic, from 1991 until 1997, U.S. businesses invested $10 billion in 
the Russian economy. A free democracy, a free market economy. 
During that same period of time, U.S. businesses invested $350 bil- 
lion in the Chinese economy. 

For those that say that our policy should have been based strictly 
on dealing with President Yeltsin, because the Duma was domi- 
nated by Communists, they have to justify in my mind how they 
can go hog wild in dealing with the Chinese Communists, who 
never were elected. And these, the Communists in Russia, were 
elected in free and fair elections. 

Our problem with Russia has been for the past seven years we 
have been so preoccupied with the Clinton-Yeltsin relationship that 
anything that would disturb that relationship, anything that would 
cast a negative impression on our relationship with President 
Yeltsin or Russia in fact was denigrated, was denied or basically 
was cast aside, and that is not just in IMF funding. I did a floor 
speech a year ago where I documented seventeen violations of 
international arms control regimes by Russia. How many times did 
we impose the required sanctions? Zero. We had the evidence. In 
fact, Gordon Eyler had to resign his job. Why, because as the head 
of the non-proliferation center for the CIA, he made the mistake of 
telling Congress that Koptev's agency was working with the Ira- 



80 

nians on the Shahab 3 and the Shahab 4. What was his reward? 
Forced out of his position. 

Mr. Woolsey left the agency in January 1995 and did an out- 
standing job. At the end of that year, the CIA completed an intel- 
ligence report that he wasn't a part of, called NI9519, which under- 
stated the threat that was being caused by Russia proliferating 
technology around the world, and it was the Rumsfeld Commission 
two years later that caused the CIA to reverse itself and acknowl- 
edge that they made a fundamental mistake, they underestimated 
the Russian threat. 

When I got that brief in the Intelligence Committee hearing on 
the day after it was released, I asked the CIA briefer, David Osias, 
"How can you make these conclusions that Russia is no greater a 
threat today than it was back in 1991." He said "That is our infor- 
mation. If you don't like it, that is the way it goes." Two years later 
the CIA reverses itself and says that they made a fundamental 
mistake. And yet we based much of our discussions with Russia on 
strategic issues on that report. 

Or look at the Russian fission program, which is a program run 
by the Department of Energy up through the beginning of this Ad- 
ministration. That program was ended in 1994. The material was 
shredded because it looked to the insecure relationship and the 
control of Russian fission material. 

My position is that we were so preoccupied with bolstering up 
Boris Yeltsin that we didn't want anything to surface in any area 
that would undermine Yeltsin. Look at the letter that Bill Gertz re- 
vealed for the first time in his book "Betrayal", which just came out 
this summer. 

For the first time, Mr. Chairman, the memo that Bill Clinton 
sent to Boris Yeltsin during the Presidential reelection in Russia, 
he is saying, "Don't worry, we will not let anything happen that 
undermines your leadership. We won't let anjrthing happen to em- 
barrass you." That was sent by our President to Boris Yeltsin the 
year that Yeltsin was running for president. 

My position, Mr. Chairman, is that this is a pattern that goes far 
beyond IMF funding. We didn't want to hear the bad news. That 
does not mean that we should withdraw from Russia. I support all 
of the Administration's initiatives, but you have to deal from a po- 
sition of strength, consistency and candor and when you don't fol- 
low those three principles, Russians will not respect you, and I 
agree with Mr. Brovkin today, the Russian people don't respect us. 
And to be honest if I were sitting in their shoes, I would think the 
same thing. Why should I trust America? 

You reinforce the corrupt administration. You saw the oligarch 
siphoning off this money that was supposed to reform the coal in- 
dustry, and you denied when reality was occurring that we knew 
things were wrong, and now you want us to believe that you care 
about our stability. We have a real problem on our hands. 

Mr. Chairman, unlike some of my colleagues I do believe that we 
are at fault as a Nation. In fact, five years ago General Alexander 
Levitt testified before the Congress twice, and following his testi- 
mony, Alexey Yablokov, the leading Russian economist, testified 
before Congress twice, and five years ago they told this Congress 
that it was corrupt, the leaders were siphoning off money and that 



81 

policies had to be changed, and we did nothing about it. That is our 
fault. 

Chairman Leach. Well, thank you very much, Mr. Weldon. 

Let me just conclude by making one comment that is a little 
afield, but I think is very important. We have two representatives 
of the Central Intelligence Agency of the United States, former rep- 
resentatives. In America we sometimes argue that the CIA has 
done an inadequate job. We argue that it has been too intrusive or 
not intrusive enough. But when you contrast the CIA with the 
KGB, the contrast is rather severe. There is something that stands 
out today that I think is really important. We take for granted the 
fact that the United States intelligence community is basically as 
corruptionless and as conflict-of-interest-less of any institutions of 
any kind anywhere in the world. And if it were any other cir- 
cumstance, this country would be in grave difficulty. 

Of all the comparative lessons when we look at Russia today and 
we see the infiltration of former KGB into the financial system, 
into the economy, and we wonder what is unique about Russia, be- 
cause there are other kleptocracies in the world, but one of the 
unique aspects of Russia today is: A, that it is so large and extraor- 
dinary; and B, it is a backward economy in many ways, but it is 
immensely sophisticated in many other ways, for example, intel- 
ligence and military hardware. 

So the combination of kleptocratic greed, coupled with central- 
ized controls and bureaucratic expertise and coercion of a historical 
nature is something that the world has never seen before. So we 
are looking at a situation that is absolutely novel, as well as a situ- 
ation that has precedents in other societies. But the combination 
of situations is novel. 

So A, I want to thank two particular witnesses for their distin- 
guished public service and I would like to thank three others for 
distinctive analysis, and thank you for your testimony today and 
we will commence with the third panel. 

Mr. WOOLSEY. Thank you, Mr. Chairman. 

Mr. Ermath. Thank you, Mr. Chairman. 

Chairman Leach. Our third and final panel will be composed of 
Mr. Yuri Shvets, who is a former KGB agent; Ms. Ann Williamson, 
who is an author of a forthcoming book entitled "Contagion: The 
Betrayal of Liberty; Russia and the United States in the 1990's"; 
Mr. Arnaud de Borchgrave, who is currently at the Center for Stra- 
tegic and International Studies; and finally, Mr. Richard Palmer, 
who is a former CIA station chief 

We will begin in the order of introductions and let me just say 
I apologize partly on the lateness of the day, but all statements will 
be placed in the record and I would like you to do your best to riot 
be as lengthy as possibly you might have intended. We will begin 
with Mr. Shvets. 

STATEMENT OF YURI SHVETS, CONSULTANT, FORMER KGB 

AGENT 

Mr. Shvets. Thank you, Mr. Chairman and Members of the com- 
mittee, for extending an invitation to appear before the distin- 
guished committee. This is a unique experience and privilege for 
me to appear before a committee of the United States Congress. 



82 

Chairman Leach. Excuse me, if I can ask you to bring the micro- 
phone a little closer. 

Mr. Shvets. From 1980 to 1990, I worked for the KGB intel- 
ligence service. Starting from 1988, the KGB intelligence service fo- 
cused primarily on following domestic developments in the Soviet 
Union. It was also preparing for future market reforms in the So- 
viet Union. The number one priority of any KGB officer was to 
work on establishing new businesses or penetrating existing busi- 
nesses, including the banks. I was a senior analyst, and my respon- 
sibility included analyzing the information provided by the field of- 
ficers and composing reports to the top leadership of the country. 

In September 1990, I resigned from the KGB intelligence service 
on political grounds. At that point it was clear to me and to many 
of my colleagues that the leadership of the KGB and the Soviet 
Communist Party were ruining the country. Later I published my 
book about my experience with the agency, which was published by 
Simon and Schuster in New York in 1995. The same year I was 
granted political asylum in the United States. 

Widescale infiltration of the Western financial system by Russian 
organized crime started right on the eve of collapse of the Soviet 
Union. The main players of the game were high ranking officials 
of the Soviet Communist Party, top KGB leadership and top bosses 
of the criminal world. They joined forces by the end of the 1980's 
on the initiative of the Communist Party, and this unique forma- 
tion is called today by the Russian people the Russian mafia. The 
primary objective of this brotherhood was to accumulate maximum 
personal wealth and build safe havens abroad before Russia plum- 
meted into financial chaos. There was little doubt among them that 
the collapse was more likely than not in the near future. 

The first full-scale money laundering in Russia to the best of my 
knowledge is associated with the All-Russia Exchange Bank. It was 
established in Moscow on April 24, 1991, but the concept of this op- 
eration had been formulated in the mid-1980's. The bank was es- 
tablished under the full KGB control and one was under its total 
operational control. As a front of the operation, the KGB used a 24- 
year-old Russian citizen, Alexander Konanykhine, appointing him 
the president of the bank. The full corresponding account of the 
All-Russia Exchange Bank was opened in the Central European 
International Bank, Bupapest, Hungary, in November 1991. From 
November 1991 to May 1992, the bank channeled from Russia hun- 
dreds of millions of dollars which are still missing. The total 
amount of the theft is not clear yet. High ranking officials of law 
enforcement agencies speaking before the closed door in Russian 
Duma acknowledged the theft of $300 million. The former presi- 
dent of the bank recently publicly acknowledged the theft of $1 bil- 
lion. It is remarkable that the money was being taken out of Rus- 
sia during the first months of Boris Yeltsin assuming the presi- 
dency of independent Russia. The newly appointed democratic gov- 
ernment, chaired by Yegor Gaydar, declared that the state reserves 
of hard currency were totally depleted and asked the West for hu- 
manitarian aid. At the same time humanitarian aid was coming in, 
the former KGB was taking hundreds of millions of U.S. dollars out 
of Russia. It is even more remarkable that the theft was committed 
by the former KGB in 1992, but after this date the Russian mili- 



83 

tary prosecutor's office has been going out of its way to cover the 
theft up. Several governments and prime ministers and prosecutors 
were appointed and dismissed, but miUtary prosecutors kept cover- 
ing this crime up. 

The Russian government went as far as misinforming the U.S. 
Administration on this case. It demonstrates better than any dec- 
larations of the Russian officials that the former KGB leadership 
is as powerful today as it was in the Soviet Union and is as well 
connected at the top Yeltsin regime and that this regime is corrupt. 

I would add also that this bank, while executing this money 
laundering operation, contributed significantly to the Yeltsin elec- 
toral campaign in 1992. 

As a result, I am not very much optimistic when the Russian law 
enforcement agency pledges to cooperate with the American coun- 
terparts on investigating allegations of money laundering in the 
Bank of New York or other American financial institutions. When 
the All-Russia Exchange Bank completed money laundering oper- 
ations, the president, Alexander Konanykhine, moved to the United 
States and was granted political asylum in this country. I believe 
it was a mistake. I believe granting him political asylum was a 
mistake. There are strong indications that Konanykhine was a will- 
ing accomplice of the KGB in the operation, in stealing the money 
from Russia and laundering the money through Western financial 
institutions. 

A recent high-ranking delegation of the Russian law enforcement 
agency visited the United States and about two days ago they re- 
turned back to Moscow. Their position is there are no corroborating 
facts of Russian money laundering and the infiltration of Western 
financial systems by Russian criminals. 

I would respectfully direct attention of the distinguished Mem- 
bers of this committee to the All-Russia Exchange Bank case. This 
case has it all. Large scale money theft from Russia, money laun- 
dering through the international financial system, coverup and de- 
ception of a foreign government. 

As for the situation being discussed today on what to do next 
concerning Russian corruption and money laundering, I believe it 
is a complicated issue, but there is a solution, and it may not be 
as complicated and as difficult to achieve as it may seem. We have 
to realize that the so-called Russian "elite", the people who have 
the real money in Russia, have the real power. They keep their 
personal savings in the West. They steal in Russia, they transfer 
money to the West and this is where they build their safe havens. 
They realize that what they are doing right now in Russia sooner 
or later may break the country apart, and then they will flee the 
country and come over to the West and enjoy their life here. 

It is my understanding and it is the understanding of an average 
Russian citizen, if the people are totally dependent on the West, 
the West has the right to tell them loud and clear that the West 
will not tolerate corruption, outrageous corruption and money laun- 
dering involving Western financial institutions. I believe that this 
message alone sent loud and clear to the Russian elite will make 
a big difference. Thank you very much for your attention. 

[The prepared statement of Yuri Shvets can be found on page 
263 in the appendix.! 



84 

Chairman Leach. Well, thank you, Mr. Shvets. 
Ms. Williamson. 

STATEMENT OF ANNE WILLIAMSON, AUTHOR 

Ms. Williamson. Before I begin my testimony, I want to take a 
moment to thank you. Chairman Leach, and Ranking Member La- 
Falce for the opportunity to share with the House Committee on 
Banking some of the things I have learned over eight years of 
watching our Russian assistance program unfold. Chairman Leach, 
I particularly want to commend your efforts to lead the Congress 
on this very timely investigation of the true nature and unhappy 
consequences of our Russian policies. 

I should just like to add a few words about myself. I am the au- 
thor of "Contagion: The Betrayal of Liberty; Russia and the United 
States in the 1990's", which will be available to committee Mem- 
bers and the American public in time for the Nation's Thanksgiving 
holiday. 

Chairman Leach. Who is the publisher? 

Ms. Williamson. They will find out in November. It is a sur- 
prise. Prior to beginning my work on the book, I covered just about 
all things Russian for a broad range of publications, including the 
Wall Street Journal, the New York Times, Mother Jones, Art and 
Antiques, Premiere, Film Comment and Spy Magazine. From the 
late 1980's until 1997, I maintained homes in both Moscow and the 
United States, and therefore I can say that for much of the last 
decade I had the privilege of being a witness to the dramatic his- 
tory unfolding in Russia and the pleasure and excitement of shar- 
ing with the Russian people their remarkable land, language and 
culture, and it is with a profound gratitude to them and a deep re- 
spect for that noble, heroic and too-long suffering people that I 
speak to you today. 

In the matter before us — many billions churning through West- 
ern banks, we should look at this as an opportunity, because it 
throws open a window on what sort of financial arrangements a 
country without property rights, a country without banks, a coun- 
try without certainty of contract, a country without an accountable 
government or a leadership decent enough to be concerned with the 
national interest or its own citizens' well-being looks like. It is not 
a very pretty picture, but let there be no mistake, in Russia the 
West has truly been the author of our own misery. And there are 
two victims to this story: The first, U.S. taxpayers along with other 
Western taxpayers, and Russian citizens whose national legacy was 
stolen only to be squandered and/or invested in Western real estate 
and equities markets. 

The failure to understand where communism ended and Russia 
began insured that the Clinton Administration's policies toward 
Russia would be riddled with error and ultimately ineffective. Two 
mistakes are key to understanding what went wrong and why. The 
first mistake was the West's perception of the elected Russian 
president, Boris Yeltsin; where American triumphalists saw a great 
democrat determined to destroy the Communist system for free- 
dom's sake, Soviet history will record a usurper. A usurper's first 
task is to transform a thin layer of the self-interested rabble into 
a constituency. Western assistance, IMF lending and the targeted 



85 

division of national assets are what provided Boris Yeltsin the ini- 
tial wherewithal to purchase his constituency of ex-Komsomol bank 
chiefs, who were given the freedom and the mechanisms to plunder 
their own country in tandem with the resurgent and more economi- 
cally competent criminal class. The new elite learned everjdhing 
about the confiscation of wealth, but nothing about its creation. 
Worse yet, this elite thrives in the condition of chaos and eschews 
the very stability for which the United States so fervently hopes, 
knowing full well as they do that stability will severely hamper 
their ability to obtain outrageous profits. Consequently, Yeltsin's 
reform government was and is doomed to sustain their parasitic po- 
litical base composed of the banking oligarchy. 

The second mistake lay in a profound misunderstanding of the 
Russian culture and in the Harvard Institute of International De- 
velopment's advisers' disregard for the very basis of their own 
country's success; property rights. It was a very grave error. Pri- 
vate property is not only the most effective instrument of economic 
organization, it is also the organizational mechanism of an inde- 
pendent civil society. The protection of property, both of individuals 
and that of a nation, has justified the existence of and a popu- 
lation's acceptance of the modern state and its public levies. 

Without private property, Russians will never pay taxes nor will 
any other population that I know of in the world. Russian property 
rights are tricky. Property has never been distributed, but only 
confiscated and awarded on a cyclical basis. For the big players, 
property exists as it always has, where there is power. For the 
common man, the property right hasn't advanced much beyond cus- 
tom, which prevents the taking of any man's shelter, clothes or 
tools so long as a continuous usage is demonstrable. An additional 
purely Slavic feature of the Russian's concept of property is the 
shared belief that each has a claim upon some part of the whole. 

The whole is known as the votchina, or the estate, and was held 
by all members of a particular clan. This understanding of property 
still informs the culture; Westerners bemoan Moscow Mayor Yuri 
Lyuzhkov's retention of the system of the residential permit, or 
propiska, as an impediment to a more flexible labor force, but this 
policy is one of Lyuzhkov's most popular. Moscovites are well satis- 
fied with a mayor who polices outsiders as they believe any propri- 
etor of such a great estate as Moscow should. 

The Russians' failure to accept the Roman concept of private 
property has compelled them to suffer the coercive powers of the 
state so that at the very least a civil order, if not a civil society, 
might be established and sustained. The hackneyed idea that Rus- 
sians have some special longing for tyranny is a pernicious myth. 
Rather, they share the common human need for predictable event 
undergirded by civil and state institutions, and their difficult his- 
tory is the result of their struggle to achieve both in the absence 
of private property. 

We are running short on time and so I will just briefly add that 
the real problem with our privatization program was in its concep- 
tion. It wasn't a bad idea, a share holding society. In fact it was 
rather good, because a share holding society would have addressed 
the central flaw in the Russian concept of property, which was that 
it was non-transferable. It is a very great shame that the Harvard 



86 

Institute of International Development, along with advisers from 
the multilateral institutions, thought that they could simply over- 
ride this concept and target particular players with the property. 
It is a very great mistake to think that all of the injustice began 
with loans-for-shares. You simply need to examine closely the pri- 
vatization program, voucher privatization, which American citizens 
paid for with $325 million. It was a tremendous swindle and the 
Russians knew it. They knew it at the time and so did the advisers 
in Moscow. I spoke with them in real time. I have many interviews 
and quotes from these people, and this is something of a mjdh that 
they are attempting to create today by saying that the problems 
began with loans-for-shares. It simply isn't true. 

Second, the idea of freezing prices in a monopolistic economy is 
simply mad. All that happened is that the monopoly producers 
raised prices without penalty. In turn, the Russian people were 
robbed of their national savings. That is why they had a 2500 per- 
cent inflation in 1992. By the time the property auctions began in 
1993, the only money available to participate was criminal money 
and foreign money. In other words, the money coming into Russia, 
that is when it is laundered. It is going out as capital flight. It is 
going out as capital flight, because there are no banks, because no 
rational person can possibly work within this system. 

Today when we hear very much criticism about the national 
character and the nature of Russian business, I would remind ev- 
eryone in this room if any of us were living in such a society with 
so many distortions and disincentives, we would behave in exactly 
the same way. There is nothing wrong with the character of the 
Russian people, their energy, their resourcefulness, their ability to 
produce, but they are extremely hampered by the government and 
by the lack of a judicial system and by the West continuing to fund 
a criminal government. 

Now since the party had the property, no individual Russian 
could ever be sure of anything upon which to build wealth. And let 
us not forget that the property right is the poor man's ticket into 
the game of wealth. The rich have their friends and money. The 
poor must rely upon the law. And it was in the absence of property, 
and it was access, the opportunity to seek opportunity and favor in 
which the Russians began to traffic. This is what colors their be- 
havior and culture to this day. The connections achieved in turn 
became the most essential tools a human being could grasp, employ 
and over time in which he might trade. Where relationships, not 
laws, are used to define society's boundaries, attribute must be 
paid. Bribery, extortion and subterfuge have been the inevitable re- 
sult. And what marks the Russian condition in particular is the 
scale of these activities, which is colossal, as is her wealth. Russia 
is a negotiated culture, the opposite of what an openly competitive 
productive market requires. 

There was an alternative in Russia in 1992. A woman by the 
name of Larisa Piasheva was appointed privatization chief by Mos- 
cow Mayor Popov. She had devised a true free market program, an 
actual one based upon the principles of Werner Erhard, his reform 
in Germany. Essentially she was going to pursue Lenin's revolu- 
tionary dictum of property to the people, factory to the workers in 
a rapid and fearless plunge into the market which would have dis- 



87 

tributed property widely into Russia's many eager hands. Her pro- 
gram did not rely upon Western lending, but instead tailored itself 
to maximize direct Western investment with a particular emphasis 
on the development and the protection of property rights. After rob- 
bing the Russian people of the only capital they had to participate 
in the new market, the nation's household savings, America's ad- 
visers signed on with the brave young Russian reformers who had 
ginned up a development theory of big capitalism based on Karl 
Marx's mistaken edict that capitalism requires the accumulation of 
capital. The big capitalists would appear instantly, they said, and 
a broadly based market economy shortly thereafter. If only the 
pocket of preselected members of their own ex-Komsomol circle 
were properly stopped. Those who hankered for a public reputation 
were to secure the government purchases from which they would 
pass state assets to their brethren in the nascent business commu- 
nitv happy in the knowledge that they too would be kicked back 
a significant cut of the swag. The U.S.-led West accommodated the 
reformers' cockeyed theory by designating a rapid and easily ma- 
nipulated voucher privatization program that was really only a 
transfer of title. Voucher privatizations receipts were compounded 
by a grevious insult, unregulated voucher investment funds which 
the privatizers encouraged the uncertain Russian citizenry to pa- 
tronize. Hundreds and hundreds of investment funds simply 
walked with their clients' vouchers, reselling them to dornestic 
criminals, red directors, Western investment banks and inter- 
national money launderers. 

When the eighteen-month long bank voucher privatization that 
the bank represented was concluded in July 1994, the program 
whose very design left the controlling share-holding of any single 
enterprise in the hands of the state, had actually institutionalized 
the state as the determinant owner of all that had formerly be- 
longed to the people. And that was the rationale for the loans-for- 
share program, that they had to break up the state ownership, yet 
the voucher privatization is what created it and institutionalized 
the state, because according to the Soviet Union constitution, the 
nation's assets belonged to all of the people undivided, not to the 
state. That was the legal arrangement that our program changed. 
Of course we then went on to establish a bond market. That was 
an initiative from the Bush Administration. Their yields were im- 
probable. They drew all investment to bonds to the support of the 
state just as Tsarism and communism had done previously. 

Today when the Clinton Administration says that someone had 
to keep the Communists at bay, this too is a deceit. There were no 
Communists in Russia by late 1991, only nascent investment bank- 
ers looking to nail down a stake any which way. Communism had 
evaporated by late 1987, a year in which the Russian people were 
allowed to hold convertible currency. Overnight the power of money 
replaced the power of ideology. 

We also protected the banks, we allowed Russia to protect her 
banks and opened her producers to competition with the West. It 
should have been the other way around. Her industry should have 
been protected and banking should have had to suffer the competi- 
tion of the West. At any rate after the loans-for-shares program, 
the predatory privatization continued. Directors stashed profits 



88 

abroad, withheld employees' wages and after cash famine set in, 
used those wages, confiscated profits and state subsidies to buy the 
workers' shares from them. But until the Russian people decide 
how property is to be held and secured, their decision de jure, all 
of the destructive economic arrangements and cultural behaviors 
crowding Russian history will continue. Wealth will not be created 
without private property. Without transferable property legally se- 
cure to protect, no Russian will pay taxes. Without revenues, no 
Russian government can endure without falling back on what is 
every state's fmal reserve, coercion. The best way to understand 
Russia, the Russia we must cope with, is through her most common 
souvenir, the Matreshka doll, because each doll as you examine it 
is trapped within the larger one until finally the largest doll con- 
sumes them all. It is a perfect demonstration of Russia's universe. 

[The prepared statement of Anne Williamson can be found on 
page 275 in the appendix.] 

Chairman Leach. Thank you very much. 

Mr. de Borchgrave. 

STATEMENT OF ARNAUD DE BORCHGRAVE, DIRECTOR, THE 
GLOBAL ORGANIZED CRIME PROJECT, THE CENTER FOR 
STRATEGIC AND INTERNATIONAL STUDIES 

Mr. DE Borchgrave. Thank you, Mr. Chairman, for the oppor- 
tunity to assist you in trying to illuminate this critically important 
subject. I speak to you today as Director of the Global Organized 
Crime Project at the Center for Strategic and International Stud- 
ies, which is chaired, as I think you know, by Judge William Web- 
ster, the former FBI director and director of central intelligence. 
Our project is divided into seven task forces for all matters of 
transnational crime. One of them is Russian organized crime, 
which is chaired by my Deputy Director behind me, Frank Cilluffo. 

We published our first report on Russian Organized Crime and 
its Global Implications for U.S. National Security on September 29, 
1997. Four days before its release, President Yeltsin told the upper 
house of parliament, known as the Federal Council, that "criminal 
elements have entered our political arena and are dictating our 
laws with the help of corrupt bureaucrats." 

The Russian organized crime task force is in the process of com- 
pleting a companion report updating the situation since the August 
17, 1998 meltdown. The report will be released before the end of 
the year. The key findings of the 1997 report are still very relevant 
today. They are two years old. A few of them, and I quote: Left un- 
checked, Russia is in danger of becoming a criminal syndicalist 
state under the control of corrupt government bureaucrats, politi- 
cians, businessmen and criminals with which normal relations 
would be impossible. 

Russian organized crime, ROC, constitutes a direct threat to the 
national security interests of the United States by fostering insta- 
bility in a nuclear armed major power. Equally ominous is the chal- 
lenge to national security and law enforcement posed by the 
transnational operations and alliances of ROC groups. Overall, 
some 200 large, sophisticated ROC groups are now operating in 58 
countries, which is up from 29 countries four years ago according 
to the FBI. 



89 

The processes of democratization and economic liberalization in 
Russia are being seriously undermined by ROC. ROC has extended 
its tentacles throughout Russia's economy, which confers an aura 
of legitimacy to myriad illicit activities, including the manipulation 
of Russia's banking system and financial markets. 

In the absence of effective courts, a working judicial system, and 
consistent enforcement of established commercial and contract law, 
criminal elements have become de facto adjudicators. Protection 
rackets in effect have usurped the government's traditional legal 
functions and safeguards. 

So what was a threat two years ago is a reality today. 

The CSIS report on ROC was quickly endorsed by FBI Director 
Louis Freeh, but just as quickly dismissed by high ranking Admin- 
istration officials, even though the intelligence community was well 
aware of the facts, as you have already heard today. 

The genesis of the Global Organized Crime Project at CSIS goes 
back to 1994, when a wealthy friend of mine with high level con- 
tacts in Moscow was called by one of his contacts who said "Could 
you please take care of five Russians coming over to New York next 
week?" He said "no problem." He quickly discovered that what they 
really wanted was an introduction to his banker in Nassau in the 
Bahamas, where he also kept a house. Two days later he got a call 
from this banker saying, "Do you realize what your Russian friends 
wanted?" He said, 'Tes, I assume that they wanted to open a bank 
account." He said, "Do you realize for how much?" He said, "Well, 
I thought it might be a few million. Why, what is the problem?" 

And the Swiss banker said, "The amount was $2.5 billion, which 
they wanted to put in untraceable accounts through a variety of 
offshore tax havens." Zurich turned down the business. 

Three weeks later I was in the south of France on vacation sit- 
ting next to another Swiss banker based in Monte Carlo. I re- 
counted the anecdote and he said, "What a coincidence, I had a 
Russian walk in two days ago with no introductions who wanted 
to deposit $400 million through six different countries as well." 

1994, as you may recall, Mr. Chairman, was also the year the 
late Claire Sterling, a much honored investigative reporter, pub- 
lished a book titled "Thieves World," which documented chapter 
and verse on the global tentacles of ROC. Ms. Sterling had traveled 
the world, including several trips to Russia, to investigate the con- 
nections between Russian intelligence and security agencies, orga- 
nized crime syndicates and the so-called oligarchs who plundered 
Russia systematically under the guise of various privatization 
schemes. There was no doubt in Ms. Sterling's mind that this le- 
thal mix enjoyed the protection of the powers that be in the Krem- 
lin. I also traveled extensively on behalf of CSIS's Global Organized 
Crime Project without using any of Ms. Sterling's contacts. We de- 
liberately avoided duplication. From Buenos Aires to Berlin, from 
London to Lugano, from Bogota to Beirut, the pattern was iden- 
tical — countless billions of dollars siphoned out of Russia that were 
laundered before buying commercial properties or being used to 
pay cash for lavish private residences in Europe's capitals and in 
the Mediterranean's luxury resorts, as well as to purchase yachts 
and private planes. I personally discovered scores of examples of 



90 

properties ranging in price from $5 million to $75 million, paid for 
by Russians in cash. 

Little known outside the intelligence community is the fact that 
the clandestine stripping of Russia's assets began as early as 1985 
and 1986 when key members of the Soviet Communist Party's Cen- 
tral Committee concluded that President Gorbachev's glasnost and 
perestroika policies would lead to the collapse of communism. This 
is when these Central Committee members turned to the KGB for 
assistance in moving abroad precious metals and stones and liquid 
assets. The KGB was the only organization familiar with Western 
conduits willing to handle this clandestine traffic. 

When the Soviet empire began to implode in 1989, many of these 
Communist apparatchiks and their KGB associates became instant 
businessmen. 

I saw that the red light went on, so don't want to be longer than 
I am allowed to be. 

Chairman Leach. Mr. de Borchgrave, please continue if you like. 
Your statement is excellent. 

Mr. DE Borchgrave. I was trying to respect the red light. I'm 
sorry. 

Russia's much touted instant market economics and democratic 
politics were little more than a sham, Mr. Chairman. In 1997 Pros- 
ecutor-General Yuri Skuratov ridiculed President Yeltsin's seven 
major crackdowns on organized crime and corruption as a 
Potemkin Village. "It is a charade", Mr. Skuratov said in an inter- 
view. There is neither the will at the top nor the resources to do 
much about it. After three years of investigative work, Mr. 
Skuratov started prosecuting the first of 780 top officials. Not for 
long. Skuratov was framed in a sex scandal by the security services 
earlier this year and then suspended by Mr. Yeltsin for poking 
around the Kremlin's immensely complicated financial structure. 
But the Russian parliament twice declined to endorse the suspen- 
sion and Mr. Skuratov continues to speak out in interviews. He 
now says that $3.9 billion of the IMF's $4.8 billion loaned last year 
never reached Russia, but was sold by the Russian Central Bank 
directly to eighteen commercial banks controlled by the oligarchs. 

You've heard Jim Woolsey this afternoon quoting former Deputy 
Prime Minister and former Interior Minister Anatoly Kulikov. He 
was at a ROC task force in Washington a week ago. He estimates 
that about half the Russian economy is controlled by shadow sys- 
tems that run illegal operations. 

Kulikov also estimates the amount of capital flight since 1992 is 
close to $300 billion. Some 55 offshore secrecy jurisdictions from 
Vanuatu in the Pacific to island nations in the Carribean and a 
dozen countries from Bahrain to the Bahamas were eager to take 
in Russia's dirty laundry. In 1995 and 1996 about $1 billion a 
month came into Cyprus from Russia and another $1 billion a 
month went in and out of Israel. The money laundering activities 
uncovered recently by the FBI at the Bank of New York are not 
unusual. They have been duplicated by scores of banks the world 
over. Wealthy individuals have parked an estimated $8 trillion in 
offshore tax shelters that guarantee secrecy. There are also ap- 
proximately one million corporations anonjonously chartered in 
these secrecy jurisdictions that sell naturalization and a new pass- 



91 

port for $50,000. Dominica charges $75,000, but that includes pass- 
ports for a spouse and two children. This is not to say that this is 
the Russian organized crime trillions of dollars winding up in these 
places, but the facilities are extraordinary and widely used by tax 
dodgers all over the world. 

Russians have been very bitter about how what they perceive as 
American capitalism made them poor. 40 percent of the population 
is now living below the poverty line of $38 a month. Now they are 
bitter about being weak and this plays right into the hands of anti- 
American ultra nationalists. 

The totalitarian temptation, as we know, has existed in Russia 
for the past one-thousand years. It is now rearing its ugly head 
again after a decade-long taste of gangster capitalism. Last week 
Secretary of State Madeleine Albright called on President Yeltsin 
to make fighting corruption a top priority. "The problem is real, 
and must be taken seriously," said Mrs. Albright. Well, the problem 
has been real and glaringly obvious since 1991, and repeated warn- 
ings that it was undermining U.S. foreign policy objectives as well 
as diverting U.S. financial assistance and IMF loans were repeat- 
edly dismissed as exaggerations. 

It is hardly surprising, therefore, that Russian nationalists have 
convinced themselves that the United States, not content with its 
Cold War victory, was also bent on wrecking the Russian economy. 

The Administration has invariably invoked the need to give pri- 
ority to strategic arms control and economic reforms, rejecting the 
notion that the emergence of a criminal state was in direct con- 
tradiction with U.S. objectives. General Boris Gromov, Chairman of 
the Subcommittee on Arms Control and International Security of 
the Duma's Committee on International Affairs, said this week 
that the lamentable state of the Russian military was a direct re- 
sult of Western indifference to the way the Kremlin robbed the 
armed forces of the resources needed to maintain cohesion. 
Yeltsin's so-called reforms, General Gromov said, have brought 
nothing to the majority of the Russian population but disappoint- 
ment. 

By way of conclusion, Saul Bellow once said that "a great deal 
of intelligence can be invested in ignorance when the need for illu- 
sion runs deep." The Administration's need for illusion in its Rus- 
sian policies has been an evergreen commodity since the collapse 
of the Soviet Union. 

So where do we go from here? I think it is essential, Mr. Chair- 
man, and very urgent to weave Russia, in close cooperation with 
the Duma, into an ever tighter web of mutual interest with the 
United States with a view to encouraging transparency, the rule of 
law and the emergence of a Russian middle class. A back-to-the- 
drawing-board blueprint is provided by Congressman Weldon's 
eight-point recommendations that have been partly incorporated in 
the 1989 Russian Economic Restoration and Justice Act. 

Thank you, Mr. Chairman. 

[The prepared statement of Arnaud de Borchgrave can be found 
on page 292 in the appendix.] 

Chairman Leach. Thank you, Mr. de Borchgrave. 

Mr. Palmer. 



92 

STATEMENT OF RICHARD L. PALMER, PRESIDENT, CACHET 
INTERNATIONAL, INC., FORMER CIA STATION CHIEF 

Mr. Palmer. Thank you, Mr. Chairman, and other honored 
Members of the committee. 

First of all, I am very glad to be here today. 

Chairman Leach. Before you commence, could you give us one 
second of your background, your employment background. 

Mr. Palmer. Very quickly, I spent 5^2 years in the military, first 
as an infantry officer in Vietnam, then as an intelligence officer. 

I then spent twenty years as a CIA operations officer, eleven 
years of that as a senior manager, eighteen years of that time was 
overseas. 

I have nine years' experience in researching the subject of money 
laundering. I finished my career with a posting in the former So- 
viet Union. I then remained in the former Soviet Union for an addi- 
tional three years, worked with a Russian bank for a while, and 
also was a consultant on business and security. 

I then returned to the United States, thinking that the research 
that I have been able to do during this period on Russian organized 
crime would be of great interest, and I must say that before ap- 
pearing before this committee today, it has been somewhat dis- 
appointing. I am glad to see that someone is finally addressing the 
subject. 

Mr. Leach. Please proceed. 

Mr. Palmer. I now work in asset recovery and due diligence pri- 
marily in Russia. 

I am particularly glad to be here today, because the BBC Moscow 
is carrying a story that I was removed from the witness list be- 
cause I was the person who sent Matrokin down the street to the 
British. This is the former KGB officer who has recently written a 
book with a lot of details. I cannot discuss my CIA employment in 
detail, but I can tell you that the first time I ever heard or saw 
of Mr. Matrokin was in reading a local newspaper, and my closest 
contact to him is that I ordered his book over the Internet. 

I also know nothing about Mr. Penkovsky. 

This is a subject that presents serious threats to Western nations 
as well as involves the use of U.S. taxpayers' funds to continue the 
looting of Russia and its former republics. I feel reasonably well 
qualified on the subject as a result of my former Government serv- 
ice, personal research and professional duties. I devoted much of 
my time, energy and money to Central and Eastern Europe and the 
former Soviet Union in the last seven years, because I believe that 
the collapse of the Soviet system was an historic, revolutionary 
event and that the outcome would shape the course of history. Un- 
fortunately, we have thus far squandered our opportunity to help 
shape the outcome of this event in the positive directions that ben- 
efit the majority of the people in this region rather than just a few 
persons at the top. 

We have little time left to avoid the permanent denigration of the 
term democracy in this region and the return of totalitarian re- 
gimes which may not necessarily be Communist. This would lead 
to instability in a region that spans ten time zones and still re- 
mains the second ranking nuclear power. 



93 

Several knowledgeable, respected speakers have preceded me 
today. Indeed, Mr. Chairman, your article in the September 10th 
issue of the New York Times lays out the issues very well. There- 
fore, I would still like to preface my comments by noting a few 
points I consider givens. 

Russia is too important to us and to the world to simply aban- 
don. Second, despite the incredible, severe obstacles and forces that 
confront them, there are honest and courageous Russian officials, 
law enforcement personnel and businessmen. Regrettably that cur- 
rently represents a small minority. 

Third, most Western bankers and businesspersons have been 
more interested in making usurious profits quickly than building 
long-term investments. They have also sought to obey neither the 
law, the spirit of the U.S. laws, nor the letter of the U.S. laws con- 
cerning money laundering in their recordkeeping. Further, U.S. 
laws regarding money laundering and the conduct of due diligence 
on customers who move large sums of money are inadequate. 

We are willing to conduct stings against Mexican banks for 
money laundering for drug lords. We conduct classes not only in 
the U.S., but in foreign countries, to advise them about the U.S. 
laws on money laundering and how this can be avoided. On the 
other hand, the U.S. Crovernment has not been particularly aggres- 
sive in looking at one of the major sources of laundered funds, Rus- 
sia; and second, I have been told by several foreign countries that 
they have been, as they put it, "stiff-armed" by the U.S. Govern- 
ment when it comes to asking for our help in looking at the prove- 
nance of funds. This is something where we give the image that ba- 
sically we are going after this for competitive advantage instead of 
actually trying to stop the looting of states. 

And finally, the U.S. Government continued to seek only good 
news about events in Russia, strenuously overlooking even the 
most poignant cases of theft and criminal activity at the highest 
levels. This is self-defeating and dangerous. 

The purpose of my rather long and detailed written testimony is 
to document that the looting of the Russian state was part of an 
elaborate plan that was created in the mid-1980's. Further, current 
political leaders such as Prime Minister Vladimir Putin and Presi- 
dent Boris Yeltsin continue this program. Any objective observer 
must be swayed by the multitude of published evidence of the cor- 
ruption regarding President Yeltsin, his family members, and a cir- 
cle of financial supporters. 

The three appendices to my testimony are simply a small exam- 
ple of the documentation that are publicly available. One of those 
in Appendix A shows the documents on Mr. Borodin's Swiss bank 
account. Appendix B is a document that shows that Mr. Borodin 
bequeathed two apartments to members of the Russian government 
illegally. One was to the acting prosecutor who replaced Mr. 
Skuratov, and the other is to the chief military prosecutor for Rus- 
sia. Apparently this is to ensure that there won't be any prosecu- 
tion of the Yeltsin group. 

We must move away from the personalization of Russian policy. 
We must be able to talk to all sides. Russia is too big for narrow 
relationships. We must stop the growing popular perception in Rus- 
sia that the U.S. and democracy are simply allies of their own cor- 



59-889 00-4 



94 

rupt society and government. We must move away from channel- 
ling our support solely to the most corrupt elements of the state. 
We need to recognize that the most corrupt elements include the 
most senior politicians, bankers, businessmen and even law en- 
forcement officials of Russia. We must come to grips with the con- 
cept that the Russian government is riddled with corruption and 
there is no rule of law. To pretend otherwise is a recipe for disas- 
ter. 

Large amounts of money encourage corruption. Russian orga- 
nized crime is unique in that it is willing to spend up to 50 percent 
of its profits on corruption, including bribes to officials. That, if left 
unchecked, will corrode America's political, economic and legal sys- 
tem. Make no mistake about it, the traditional mafia hoodlums 
who steal cars, run prostitution rings and collect protection money 
comprise only about 10 to 15 percent of Russian organized crime. 
Russian officials, politicians, bankers, businessmen, industrial 
managers and even some law enforcement officials comprise the 
other 85 to 90 percent. Both components work together to subvert 
the law. Both engage in typical racketeering activities. Some just 
have better educations and dress better than others. 

Regarding the amount of money that has been stolen from Rus- 
sia, we must also include the cost of the Russian resources such as 
oil and copper in these calculations, which were sold at extremely 
undervalued prices to Russian organized crime intermediary firms. 
One frequently cited example is the fact that in 1990 one package 
of Marlboro cigarettes had the same free market cost as one ton of 
crude oil, about $3. The only problem was to have the connections 
to obtain a permit to obtain and sell the oil abroad. 

Current Russian Prime Minister Vladimir Putin provided such 
permits as part of his duties when he worked for the former mayor 
of St. Petersburg before the latter was forced to flee to France 
when charged with wholesale corruption. 

Both Interpol and the Russian Ministry of Interior estimated in 
1998 that at least $300 billion had been looted from Russia. The 
most optimistic estimates say $1 to $2 billion a month were re- 
moved, which would put the total between a very optimistic $90 
billion and a more reasonable $180 billion. Other, more realistic es- 
timates went as high as $500 billion. 

While no one knows for sure, consider the fact that Benex ac- 
counts allegedly moved up to $10 billion through one series of ac- 
counts within one year, and that was certainly only one of these 
accounts. 

The key point to remember is that the exodus of this money from 
Russia is to the West and that it uses the Western banking system 
for these movements. Combining Russian organized crime mem- 
bers, as well as simply those who do not want to pay taxes, these 
billions exit Russia leaving it to the Western countries and the IMF 
to make up the difference. In other words, even if money launder- 
ing is not considered a crime in Russia or cannot be prosecuted in 
the West, we are still helping them avoid paying taxes. The dif- 
ference is made up by our taxpayers in loans that will never be 
paid back. This means that what is considered good business for 
Western banks is forcing Western, particularly U.S. taxpayers, to 
continue to subsidize corrupt regimes and Russian organized crime. 



95 

The phenomenon of large-scale looting or kleptocracy is not and 
will not be restricted to Russia. We can expect that other autocratic 
states who encounter similar problems as they attempt to transi- 
tion to free market society — Cuba, Vietnam, North Korea and even 
China — have already begun to register striking growth in orga- 
nized crime groups, all with ties to the top of their governments. 
However, this model will also provide a preview of problems to 
come in countries such as Mexico when they begin to decentralize 
and privatize their resources. 

How to solve these problems? We have to come up with a foreign 
policy that is bipartisan and has long-term goals. We have to de- 
cide what is manageable in Russia. Certainly, we cannot walk 
away; we must work with them. But we must also tie our aid not 
to one government, not to a group of politicians on either side, but 
to cooperation between the governments. We also have to tie our 
aid to discernible, measurable goals. That means before we allow 
more investment, we should have a Russian-U.S. investment treaty 
to protect American investors. 

The European Union was successful on this. Why not us? How 
can we encourage U.S. investors to invest when we don't even have 
a treaty to protect their rights? 

Second, we must make due diligence a requirement at several 
levels of our dealings with Russia in its former republics. The argu- 
ment that effective due diligence is not possible in Russia is spe- 
cious. It is being done every day and not just in a perfunctory man- 
ner. For example, USAID and assistance programs to businesses 
should include a mandatory section that confirms that this busi- 
ness and its principals have been investigated and found to have 
no ties to Russian organized crime. These investigations should be 
overseen and conducted by U.S. or Western firms which can be dis- 
ciplined if they are found to be negligent or fraudulent in their 
work. Official Russian assurances or investigation by security firms 
with ties to Russian organized crime which comprise the majority 
cannot be taken seriously. 

Effective due diligence will encourage that honest firms stay that 
way. It will reduce cash flows to corrupt or Russian-organized con- 
trolled firms. It will give honest businesspersons some incentive to 
either stay that way or become that way. This isn't pie in the sky. 
It won't happen overnight, but we have to take a long view. 

Western banks must insist on knowing the provenance of the 
money that they accept. Accepting billions of dollars from firms 
that don't exist or consist of a small office, telephone and computer 
are not acceptable. There should be strong penalties for failure to 
exercise due diligence by any Western bank, particularly in the 
U.S., because it is the largest banking system in the world. 

And finally, banks must be held responsible for the actions of 
their employees. It strains credulity to listen to explanations that 
"we didn't notice that the billions of dollars were flowing through 
a bank, because of the actions of one or two corrupt employees." 

Finally, think of the impression we make on other countries 
when many of our banks that we use here in the Washington area, 
for example, have the letters N.A. after the name. It means they 
are based in the Dutch Antilles to minimize taxes and maximize 
profits, or I recently read that the State of Colorado has passed a 



96 

law providing for offshore companies for foreigners. Apparently 
they want to join the ranks of Delaware and similar States that 
want to attract deposits by foreigners maintaining shell companies 
in the United States. At what cost? 

I am hoping that this committee will be able to follow through 
on their plans to introduce new legislation. 

I want to thank you for your time, sir. 

[The prepared statement of Richard L. Palmer can be found on 
page 306 in the appendix.] 

Chairman Leach. Thank you, Mr. Palmer. 

Let me just begin, because you have something unique to the 
panel, in fact, unique virtually to any American, and that is, you 
have worked in a Russian bank. The impression that I have is that 
most Russian banks aren't deserving of the term of art "bank"; that 
is, that they aren't deposit-taking institutions that revolve funds to 
make loans to a community, that they are more simply money 
laundering platforms or places where government funds come in 
and high levels are siphoned off by commanders of the banks. 

Now, is that a valid observation or is that a false image? 

Mr. Palmer. I would say that that, based on my experience and 
my research, is at least 85 to 90 percent correct, sir. 

Chairman Leach. The reason I want to press you a little bit on 
this, let us say you are an American bank, and a Russian bank 
comes and says, "We want to do business with you." 

It would be inconceivable, if you are a thoughtful, reasonable 
American bank, that you would not know that that bank is not a 
traditional bank, that there is, by definition, a potential problem. 
Is that valid or not? 

Mr. Palmer. That is certainly my view, sir. The bank that I 
worked with, as many of them did, went bankrupt. It was a Rus- 
sian-owned bank in Latvia, and one of the largest American 
brokerages deposited several million dollars with that bank one 
week before it went bankrupt. 

Chairman Leach. For what reason? 

Mr. Palmer. Well, that is a question many people asked after- 
wards, because it was in the newspapers that the bank was in dif- 
ficulty. The audit papers from one of the big six audit firms said 
that the bank was quite solid, but most people don't put much trust 
in that. But what I am sajdng is you could ask a taxi driver and 
learn that people were concerned about the bank. 

Frankly, the thing that I have seen most often in American com- 
panies and firms that have been defrauded, from Russia, is that 
normally the Russian groups, or Eastern European groups in some 
cases, find someone in the American corporation that they can 
work with. 

Chairman Leach. I am going to get to that in just one second. 

First, I want to ask a very specific question. One of the financial 
institutions that has come under a great deal of attention is one 
called Menatep, and I know Ms. Williamson is familiar with it. Is 
there anyone on this panel that doesn't almost instantly under- 
stand that this is an institution of doubtful integrity? 

How would you describe it, Mr. Shvets? 

Mr. Shvets. Yes, Mr. Chairman, Menatep was one of the largest 
Russian banks, the most heavily penetrated by the KGB, starting 



97 

with the former KGB Chairman, Ivanenko. There were different 
factions within the KGB before the collapse of the Soviet Union, 
after collapse of the Soviet Union. So Menatep apparently worked 
more closer with the faction of the KGB which supported Boris 
Yeltsin in his fight against so-called "Gigashipa" in August 1991, 
and it basically fits the pattern of the KGB-penetrated financial in- 
stitution. 

Besides 

Chairman Leach. Finish your sentence, please. 

Mr. Shvets. This bank particularly, specifically was involved in, 
let us say, the American leg of the all-Russian exchange bank oper- 
ation where the Russian exchange bank former President, together 
as a representative — actually he was then vice president of 
Menatep Bank — came to this country to work on establishment of 
a bank with initial capitalization of $1.7 billion, and this mission 
was financed by Bank Menatep. 

Chairman Leach. Do you have any comments on Menatep, Ms. 
Williamson? 

Ms. Williamson. Well, it was known as a gangster bank in Mos- 
cow. And one thing about the KGB involvement, though, is that the 
CPSU banked at the Vnesheconomobank, which in the trade is 
known as V-Bank; and account number one belonged to CPSU, and 
it was actually KGB that handled the money transfers and so forth 
for the Communist Party under the Soviet Union. So their moving 
into Menatep was also a certain capturing of professionalism. But 
I do know that Income Bank employees used to complain vocifer- 
ously, because they said there is no end to the money Menatep can 
get; they constantly were refilled, they told me. 

Chairman Leach. Yes, I know. 

Mr. DE Borchgrave. Mr. Chairman, just to show you how the 
old conduits continued to be useful to latter day Russia, you have 
read about the FIMACO in the Island of Jersey, where the Russian 
Central Bank transferred several billion dollars. That particular 
ofi'shore bank in Jersey belongs to the now-called European Union 
Bank in Paris, which used to be the Banc Commerciale de Neu in 
Paris, which was used to move funds from the Soviet Union to the 
French Communist Party. 

Chairman Leach. One final question, and I turn to other ques- 
tioners, particularly Mr. Palmer and Mr. Shvets, but the other two 
panelists may have knowledge, too: Do you believe that Russian or- 
ganized crime and/or KGB has infiltrated personnel in aspects of 
the American financial system? 

Mr. Palmer. I would say absolutely. 

Chairman Leach. And can you give examples, if not of named in- 
stitutions, of kinds of personnel? Do you mean in like management, 
in computers? How do you mean? 

Mr. Palmer. The British Service has published something in 
their newspapers about two years ago that they had found, "plants 
from the KGB, or moles," who were involved in providing informa- 
tion on currency exchange rates and bank operations. 

Chairman Leach. Are these in Moscow, London, New York? 

Mr. Palmer. These are Russians who were brought into the 
banks, but these are also British citizens who are then hired by, 
now, the SVR to provide banking information. That this happens 



98 

is absolutely true. Banking and financial information is now one of 
the highest priorities of the SVR. The British have found some of 
these people, they publicized it. 

In the United States — I have been out of the Government since 
1994, so I can't speak for the U.S. Government — but it seems to me 
it begs logic to think that they would avoid the largest banking sys- 
tem in the world. 

I would also say, when you look at this case we are looking at 
in New York, you have a woman who was a teller in a bank, OK, 
first of all; and she met an American — and I know nothing about 
the case and I am not disparaging her, but in 1976 you didn't meet 
Americans on the street, strike up a long relationship with them 
and get them an exit permit to leave married. Mr. Shvets can 
speak to that. 

But someone goes out to the West and is recontacted perhaps. 
Suddenly they are moved from being a teller to a vice president of 
a bank to going to an offshore banking haven for Russia — Riga. In 
Latvia, the second largest industry is money laundering — and giv- 
ing a class on money laundering. I would think in any bank the 
alarms would go off on that. What I am saying is these things must 
be happening. 

I can say this: Following my retirement, I still met a lot of people 
from the KGB who were quite willing to come up and tell me where 
they used to work, about their backgrounds, and they would tell me 
one of the first things they did was contact the agent they had sent 
to North America and Western Europe when they were spies and 
now recontacted them for business. That doesn't mean that these 
are necessarily on behalf of the KGB, now the SVR, but it can 
mean that this group that stole the money, that controls the 
money, has contacted people they used to work with, and now they 
have economic relations with them as well. 

Chairman Leach. Mr. Shvets, do you want to comment on this? 

Mr. Shvets. Mr. Chairman, as far as to my knowledge 

Chairman Leach. This is an interesting contrast, a former CIA 
agent and a former KGB agent. 

Mr. Shvets. We have been knowing each other for quite a while. 

Chairman Leach. I am not going to get into your background, 
please. 

Mr. DE BORCHGRAVE. Neither side could have fought me, Mr. 
Chairman. 

Mr. Shvets. Basically, minutes after collapse of the Soviet 
Union, the KGB made an attempt to directly penetrate the Amer- 
ican banking system by establishing a KGB-controlled bank in the 
United States, and they sent their human asset, so-called human 
asset, to Washington, DC, and he was trying to negotiate the con- 
ditions for opening the bank here. Eventually, he was told that 
there would be no Russian bank on American soil in the foresee- 
able future. So this attempt was stopped. 

However, for some time, I was following very interesting develop- 
ments in the policy of the Russian embassy toward the Russian 
citizens living in the United States. The problem now that such 
countries as China, Israel have citizens in large quantities living 
in other countries, and the KGB perfectly knew that Chinese intel- 
ligence was working very closely with Chinese citizens living in 



99 

other countries, specifically in the United States, because, as Chi- 
nese, they were considered potential assets of the intelligence serv- 
ice. 

The same was known about Mossad, Israel intelligence, and 
about a year ago the Russian embassy introduced special proce- 
dures for officially renewing foreign passports for Russian citizens 
living in the United States, and in order to renew this passport, 
each applicant should fill out the form which for me, as a former 
KGB agent, reminds me very much of the 1970's when the commit- 
tee had files on all formal Russian citizens. In this document and 
this application, what is important again for me from a profes- 
sional point of view, is that a Russian citizen living here as an 
American resident needs to show where they work, their employ- 
ment, their telephone numbers and their street address. 

Chairman Leach. As well as their family in Russia. 

Mr. Shvets. And the whereabouts of their family in Russia. 

So it was my experience, I take it for granted this information 
will be used by the KGB for operational needs. They can approach, 
first, this Russian in the United States who has an offer or de- 
mand, and they can put pressure on him or on her through their 
relatives living in Russia; and lots of Russians living here as resi- 
dents, they were so scared by this new form that they decided not 
to fill it out even though they couldn't return to Russia to see their 
relatives anymore. 

Chairman Leach. Thank you, 

Mr. Bentsen. 

Mr. Bentsen. Thank you, Mr. Chairman. 

Let me just follow up on the Chairman, Mr. Shvets. I have to ask 
you, did you ever imagine in your wildest dreams that you would 
be testifying before the U.S. House of Representatives Banking 
Committee as a former KGB agent? 

Mr. Shvets. It was absolutely incredible. I had a tour of duty in 
Washington, DC, in the mid-1980's, and I did visit the United 
States Congress when I worked here under cover as a Tass cor- 
respondent, but I never imagined that some day I would be testify- 
ing here before a committee of the U.S. Congress. 

Mr. Bentsen. This is an extraordinary time for ever3^hing that 
has gone on. 

Ms. Williamson, I haven't read any of your stuff and I want to 
apologize that there are not many of us here. I think they are all 
the Members who ever had a subscription to Spy Magazine who are 
left here today, but are you — in your testimony, are you asserting 
that perhaps the United States backed the wrong force in Yeltsin 
and, in fact, we should have walked away from Yeltsin some time 
ago? 

Ms. Williamson. Well, yes. I think we certainly got far too close 
to him as a personal relationship and put too many hopes on this 
man. 

You know, in 1991, we went along with the idea that what was 
triumphing was democracy, but in fact what was happening was 
that Boris Yeltsin had chosen to seize power and the obstacle in 
his way was a man named Mikhail Gorbachev and an entity, the 
U.S.S.R.; and a group of them decided, we are in the U.S.S.R. and 
will take power and take assets of the U.S.S.R. So there was this 



100 

misunderstanding of the two sides, though the Russians, particu- 
larly Mr. Yeltsin, were very clever at leading this notion along 
amongst Western participants in this drama. 

Mr. Bentsen. So you are asserting that while there was an at- 
tempted coup d'etat with respect to Mikhail Gorbachev and then 
Yeltsin and his backers seized the parliamentary building, that 
that was really subterfuge, that this was all a coup d'etat, nonethe- 
less, that was a transfer of power to oust Gorbachev; and whether 
it was the military or the old Communist regime, that Yeltsin was 
one and the same. 

Ms. Williamson. No, no. 

Mr. Bentsen. Or were there two coups d'etat going on simulta- 
neously? 

Ms. Williamson. It is my understanding Yeltsin was aware of 
the intent, that there would be an attempt against Gorbachev and 
the participants, but there are so many strange things about those 
days. I am still not entirely convinced whether Mr. Gorbachev 
knew about it or not. Why wasn't Mr. Yeltsin arrested that morn- 
ing? 

Just lots of anomalies in this story, but I don't necessarily believe 
at all that Mr. Yeltsin was part of that, but he exploited the situa- 
tion brilliantly; and then after Mr. Gorbachev's return from Four 
Oaks and the new day dawned, they moved very quickly to get him 
completely out of the way, and part of what led to that momentum 
was. Westerners flooded into Moscow and actors who really wanted 
to move this forward from Harvard University became involved, 
and they worked with the media to create this image and to move 
the situation along. And that is a separate effort, I am saying, from 
what occurred in August of 1991. 

Mr. Bentsen. I don't know about Harvard, but let me ask, but 
then you had subsequent elections in Russia, this newly constituted 
Russian Federation, and you had elections, you had the Presi- 
dential election, you had the Duma election, you have effectively a 
split government, I guess, now with the Communist-controlled 
Duma versus Yeltsin's being in the opposition, or vice versa. 

Those elections, you felt — were those substantial elections, were 
those rigged elections, or — your observation. And is Russia a demo- 
cratic country today? Would it be a democratic country? 

Ms. Williamson. I do not believe the constitution of the Russian 
Federation passed the qualifications to be truly accepted by the 
electorate. There was not a majority of the electorate that passed 
it. The elections are dubious. 

But, yes, they do have elections. And I will tell you, sir, that the 
Russian people vote in great numbers. I have witnessed them. 
They are a population that likes to vote, that likes to make their 
opinion known and select their leaders, that is true. 

Mr. Bentsen. My time is up, but I have another question. I have 
been waiting — and I am also late for a meeting I have got to make 
a presentation at, but I do want to ask two things very quickly. 

Mr. de Borchgrave, in your testimony, you cite comments by Mr. 
Skuratov that he has continued to say that $3.9 billion of the IMF 
$4.8 billion loan, made last year subsequent to August, never 
reached the Russian shores, never reached the borders of Russia, 
that that money was siphoned off. 



101 

Mr. DE BORCHGRAVE. It was sold directly, Congressman, to eight- 
een banks that were on their list of favorites by the Russian Cen- 
tral Bank; and Mr. Skuratov has given six interviews, to my knowl- 
edge, in the past fifteen days. 

Mr. Bentsen. And this is contrary to what the IMF has told — 
certainly contrary to what the Secretary of the Treasury told us 
this morning. 

Mr. DE BORCHGRAVE. That is correct, sir. 

Mr. Bentsen. And contrary to what the IMF has publicly stated 
and what Price Waterhouse and others have found. 

Mr, DE BORCHGRAVE. That is correct. 

Mr. Bentsen. Have you reviewed the evidence or has Mr. 
Skuratov provide any evidence to your committee? 

Mr. DE BORCHGRAVE. No. Mr. Skuratov, last time I saw him was 
about a year ago. What I am referring to now is the interviews he 
has been giving in Moscow. 

Mr. Bentsen. I only say that because I would be interested in 
it. I, like the Chairman, have been supportive of the IMF when we 
think they are doing a right job. I, you may know, raised objections 
with respect to our ongoing loan facility with Indonesia vis-a-vis 
the East Timor situation. I don't think that is a credit we should 
want to underwrite under these circumstances, and I would find 
the same to be true if, in fact, there is credible evidence which can 
be produced that would indicate that IMF funds are being siphoned 
off. And I would encourage you, if you have the ability to bring that 
forward, because no one else seems to have brought that forward. 

Mr. DE BORCHGRAVE. What I would respectfully suggest, Con- 
gressman, is that a staffer from this committee or several staffers 
go to Moscow and talk to Mr. Skuratov on or off the record. 

Mr. Bentsen. I defer to the Chairman, since he controls the 
pursestrings of the staff". 

Finally, let me just restate, Mr. Palmer, you are saying that all 
of this comes down — a vast majority of what is going on, this sort 
of organized corruption, Russian-style crony capitalism, if you will, 
the origin of it really goes back to the Communist Party under the 
old Soviet Union back in the late 1980's and early 1990's when 
they foresaw the breakup; am I interpreting your comments cor- 
rectly? 

Mr. Palmer. Absolutely correct. Congressman. 

Mr. Bentsen. This is not happenstance or coincidental or what 
happens, as we have seen in other countries, where you go break 
up and decentralize and oligarchs appear without basic structures 
in place. This was a planned event, in many respects? 

Mr. Palmer. Exactly right, sir, and I tried to document that in 
my testimony. 

Mr. Bentsen. Thank you, Mr. Chairman. 

Chairman Leach. Thank you. 

Mr. Lazio. 

Mr. Lazio. Thank you, Mr. Chairman. I welcome the panel. 

I would like to begin with a question for you, Mr. Shvets, and 
I want to thank you for your testimony, and I was interested in 
your testimony concerning the KGB attempt to set up a bank here 
in the States, and I am wondering what subsequently happened in 
terms of a strategy. Were there human resources, KGB resources, 



102 

that were used to infiltrate U.S. banks subsequent to that? Is that 
your knowledge of part of the strategy? 

Mr. Shvets. It is my understanding that attempts of establishing 
a KGB-controlled financial institution on American soil is not in 
the cards anymore, because they were refused this opportunity in 
1994 — 1993, I am sorry. So from this point on, their attempts, they 
concentrate — focus their attempts on penetrating Western financial 
institutions through the countries of the Third World. 

It is easier to penetrate a banking institution in the Caribbean, 
for instance, even though there are other problems. It is very dif- 
ficult to launder $10 billion through a bank in Costa Rica, because 
the whole budget of the country is $9 billion. 

Mr. Lazio. I can understand that. 

Mr. Shvets. On the other hand, they are working on it. 

The last information I got was that in April this year several 
Ambassadors of small Central American countries in Moscow were 
approached by — from what they describe to me, they were people 
connected with intelligence service and organized crime, and the 
offer was that — the message, the Russian message, was that there 
is a huge amount of IMF money stashed in European banks and 
this money is being handled by a small Russian financial company. 
This Russian company would finance any commercial project, any 
business project of this small Central American country with the 
understanding that the small country gets 10 percent, and 90 per- 
cent goes to Russia. And the total amount of loan they were consid- 
ering lending this way was around half-a-billion dollars. 

Several Ajnbassadors were approached and their governments 
took this offer very seriously, so seriously that the finance minister 
of Guatemala went to Moscow to conduct specific negotiations. 

Mr. Lazio. Let me follow up on that. If anyone else has any other 
information, I would like for them to join in. But my question is, 
subsequent to any possible KGB placement, was there any attempt, 
do you think — you know, this is to the rest of the panel — for there 
to be organized crime placement? And I noted when you talked 
about organized crime and KGB, you mentioned them in the same 
breath in terms of this approach. 

Is there any infiltration of organized crime in U.S. banks? How 
broad is it? Do you think they were placement in key banks? Is 
that part of an enterprise that reaches, I am sure, to all parts of 
the world? 

Mr. Shvets. I think that American law enforcement agencies 
should focus their attention on the banks that have Russian-speak- 
ing employees in the areas with a concentration of Russian-speak- 
ing population. I don't want to change Russian citizens living in 
United States; however, I do know that Russian organized crime 
groups living in such areas as New York, New Jersey and Califor- 
nia and Florida, they keep an eye on Russian-speaking citizens 
who have their jobs with financial institutions in this country. 

Mr. Lazio. Mr. Palmer. 

Mr. Palmer. I would just Uke to add one thing to this. The Rus- 
sian's organized crime, this society lives by corruption. They are ex- 
cellent at corrupting. They also, organized crime, inherited a lot of 
former KGB officers, unemployed, so you see a lot of the techniques 
used. If you are a small business, you might have someone come 



103 

up and say, "We are your new partner, we want 50 percent of your 
bottling plant or store or whatever." If you are a bank, it works a 
little differently. 

I have looked at eleven major cases of U.S. firms who were de- 
frauded by Russian organized crime. These are firms, I am sure the 
technique is the same, and it would make sense to you. They find 
someone in the institution who isn't adverse to making more 
money. I will give you an example. 

There is a major U.S. firm. They started a project with Russia. 
They never looked to see who they were doing business with. It 
was such a great deal, they had to hurry and get it done before 
they lost it. Four years down the road they found out they were 
short $32 million. 

Mr. Lazio. They lost it? 

Mr. Palmer. Yes. So they said, "Well, actually this is serious 
money. We have to look at it." So what they found was it was a 
vice president who had pushed this thing the whole time, and we 
were able to trace in the neighborhood of $2 million had gone to 
a Caribbean island and appeared to be his. 

The company approached him and said, "Look, the money is 
missing", and he said, "I can't tell you anything about it." They 
said, "Well, we would like you to leave." He said, "Well, gee, I 
would like to go, but you know I have a contract. I would like more 
money." Basically to get him to leave without a scandal they had 
to almost double his golden parachute. It cost them $32 million. 

What I am saying is, they find people within the organization 
that work. It is not just Russians. They can find anyone in the 
bank who can help them move the money. I think you may be look- 
ing at an example of that right now. 

Mr. Lazio. Could I ask just one question? I am sorry. I just want 
to know if anyone here at the panel can tell me anything about 
Bruce Rappaport. 

Mr. DE BORCHGRAVE. I have known Bruce Rappaport since I was 
based in Geneva, when I was Chief Foreign Correspondent of 
Newsweek Magazine for seventeen years. I had opted to live in Ge- 
neva, base myself there, and that is how I got to know Mr. 
Rappaport. And what I know is that he was always involved in the 
days of the Cold War on business with the Soviet Union. That is 
all I know about him. 

Mr. Lazio. Do you know an3rthing about his involvement with the 
Bank of New York? 

Mr. DE BORCHGRAVE. No, sir. 

Ms. Williamson. Representative Lazio, I would add that they 
were rather open about this. I interviewed Yuri Kovalovki in early 
autumn 1991; and he is a well-known gentleman with the KGB 
until just several days ago, Mr. Shvets has informed me. But at 
any rate, there was a lot of talk about reorganizing the KGB at 
that time, and they split the agency into a domestic and an exter- 
nal service — so forth, so on — but we were discovering that — and he 
was very frank. 

He said, "We are going to use our agents for economic purposes, 
for economic development"; and I said, "Well, gee, wouldn't that be 
more appropriate for someone in the finance ministry or other 



104 

areas?" "Oh, no, these people, that is what our job is going to be 
is economic development." 

It was quite clear what he meant. So you could get this informa- 
tion very early. 

Mr. Shvets. If I may add. Congressman, after collapse of the So- 
viet Union the Russian government had problems paying salaries, 
even to intelligence service employees. So what Mr. Primakov did, 
when he was appointed director of the Russian intelligence service, 
he allowed intelligence services employees to do private business on 
the basis of information, intelligence information, and intelligence 
contacts that they had, so basically to make their own living using 
their official positions; and that is exactly what happened. They 
went out, using different compromising materials, intelligence in- 
formation, and they penetrated a huge amount of businesses. This 
is not all of them. If you have a successful Russian business, they 
give them three or four months — which have business with foreign 
partners, they give this company three or four months to see how 
it works. If the company looks successful, two visitors from the 
Russian intelligence service visit the boss of this company, and 
they offer a deal, if you don't want to have problem, if instead you 
want to be helped, we want two positions in the administration of 
your company, second from the top, and we want — this is a subject 
of negotiation — from 30 up to 60 percent of profit of this company, 
and I was told that in most cases this offer is accepted. 

Mr. Lazio. Official extortion. Thank you very much, Mr. Chair- 
man. 

Chairman Leach. Thank you, Mr. Lazio. 

Mr. Royce. 

Mr. Royce. Yes. 

Mr. de Borchgrave, in your capacity as director of the global or- 
ganized crime project, how would you evaluate the Administration's 
policy toward senior level reformers in the Russian government 
and reformers outside the government? Have these reformers re- 
ceived the support that they needed to implement actual changes; 
and absent United States support, were their efforts doomed to 
fail? In other words, were we the only ones that could have affected 
this? 

And the second question I would ask you is, to what degree has 
the IMF policy of distributing funds without any condition for loans 
aggravated the problem of capital flight? Are there specific legal or 
economic reforms that would address the capital flight problem and 
provide incentives for Russians to keep their money in the country 
or are the problems so deeply rooted that nothing short of finan- 
cial — just complete, fundamental cultural change could remedy this 
situation? 

Mr. DE Borchgrave. Well, sir, to pick up again on what I said 
at the end of my testimony, where do we go from here? I said, as 
I recall, we should weave Russia, in close cooperation with the 
Duma, into a very tight web of mutual interest with the United 
States with a view to encouraging transparency, the rule of law 
and the emergence of a Russian middle class. 

I don't think it is too late for that. We have to just get on with 
it; and clearly we have to bypass the family in the Kremlin, and 



105 

that can be done in my judgment. As for the reformers that you 
asked me about, there were no reformers. 

Mr. ROYCE. Back to the issue of IMF distribution of funds with- 
out conditions on those funds and whether or not that aggravated 
capital flight. 

Mr. DE BORCHGRAVE. Of course, it did, Congressman. And clear- 
ly, new rules and regulations are required; and that is, I assume, 
the assignment of the Banking Committee. 

Mr. RoYCE. Let me ask another question to any of the witnesses, 
and that is, several of you today noted that corruption is now kind 
of an inherent part of the system there, and the Russian Duma has 
passed anti-money laundering legislation, I think, twice; somebody 
said five times. President Yeltsin has vetoed it each time, which 
suggests lack of commitment to addressing the problem created by 
the thriving criminal element in Russia. 

What are the prospects for meaningful anti-money laundering 
legislation being enacted now? I mean, has the attitude changed 
there in the executive branch? 

Mr. DE BORCHGRAVE. I go back, sir, to what happened with FDD 
42 — I believe the number was number 42 — in 1995, President Clin- 
ton decided to crack down severely on money laundering centers 
the world over, and if we could not persuade them to curtail these 
activities, we would then take them out of the American financial 
loop. The problem with that FDD is that there is no such animal 
as the American financial loop. There is a seamless global elec- 
tronic web in which money can be laundered through six different 
countries in one day. 

Mr. ROYCE. And what about the prospects now — for any of the 
panelists — of getting the Russian president to change his attitude 
about constantly vetoing these bills passed by the Duma? 

Ms. Williamson. I would just say you could probably get that 
legislation signed, but it doesn't mean it is going to be enforced. 

Mr. ROYCE. Only a month ago he vetoed it, right? 

Ms. Williamson. Right. But again, even as a FR move, he might 
do that, but it isn't relevant to whether it will be enforced. And an- 
other element to the capital flight as well as the looting, the state- 
sponsored looting of Russia, is the draconian taxation which the 
IMF encourages and asked the Duma to raise taxes even further, 
and if these taxes were imposed upon our population, we would 
have similar problems, quite frankly. 

So, again, I go back instead to of lots of forms and regulations; 
let us get serious about the property rights and taxation and ra- 
tional economics. 

Mr. ROYCE. I see. 

Yuri. 

Mr. Shvets. The problem right now in Russia is that the system, 
legal system and law enforcement practice, is such that it is impos- 
sible to do successful business following the law. If you strictly fol- 
low the law, if you pay all taxes, if you pay all import, export dues, 
you are broke. So basically any successful businessman has just 
committed a sort of crime. 

So, if you even pass the law, it will again be up to a bureaucrat 
in a law enforcement agency to make a decision. This businessman 



106 

will be prosecuted, and this one will not be prosecuted; and again, 
you have a problem of corruption. 

So I don't think that — even if the legislation is passed, I don't 
think that it will be a solution. 

Mr. ROYCE. I see. OK. Thank you. 

Yes. 

Mr. Palmer. I would think the chances are still rather slim, be- 
cause the Yeltsin family is still very concerned about maintaining 
their economic, financial support coming into the elections, where 
they hope to put up their own candidate; and they are worried 
about their futures. 

But I agree with everyone here. If they passed it, it would never 
be enforced anyhow. I have lived in these countries and seen that 
their laws have no relationship to what the courts do. Unfortu- 
nately, it is a fact that most judges can be bought. I mentioned in 
my testimony that a company has a decision by the Russian su- 
preme court, and in two years hasn't been able to enforce it, re- 
garding one building, and the courts have no effect. 

On the other hand, it would be effective, at least if we had some 
document, through which we could say, "Aha, at least to us it looks 
like money laundering in Russia." 

Mr. ROYCE. Let me make a point and that is, from my stand- 
point — I understand the points you have made, but from my stand- 
point, for the Duma, if the Duma wanted to do an investigation, 
at least if there was a law on the books, they would have the right 
to access the information. But currently they cannot trace money 
laundering, because there isn't even a law to point to, because it 
has been repeatedly vetoed; and that is why I raised the point. But 
would you concur with my analysis on that point? 

Mr. Palmer. I think it is absolutely an essential first step, and 
I couldn't agree more, sir. I think it is absolutely critical that we 
press for this. What type of success we will have is another matter. 

Mr. ROYCE. I understand your wider point on the front in terms 
of the rule of law being inoperable. Well, thank you again. 

Chairman Leach. Thank you, Mr. Royce. 

Mr. Weldon, do you want 

Mr. Weldon of Pennsylvania. I just think the testimony from 
all three panels has reinforced the notion that we can't impose re- 
quirements on Russia unless we have a viable process that works 
within Russia. We have not done enough, I think, to solidify the 
nature of democratic institutions in Russia. We have been so pre- 
occupied with bolstering up what is now a floundering presidency 
that we have ignored the institution of parliament, which could to 
some degree have the ability to provide a check and balance inside 
of Russia, and therefore, I think that should be a top priority. 

In closing, I would just like to ask if they could give us some of 
their own views on, one, are the major potential candidates for suc- 
ceeding Yeltsin, namely, Luzhkov, Primakov, Putin? Do they have 
any ties to corruption that perhaps Yeltsin and Chernomyrdin have 
had? 

Number two, who is really running Russia today? I am firmly 
convinced it is not Yeltsin. Is it Tatyana? Is it Barazovsky? Who 
is in charge? 



107 

And number three, do the tentacles of the corruption effort in- 
vade MINATOM, the Ministry of Atomic Energy and the nuclear 
stockpile of Russia, and are they also intertwined with the Ministry 
of Defense and agencies like Rosvooruzheniye who does the arms 
marketing for much of Russia's conventional arms? 

Chairman Leach. I apologize to my colleague. This is a treatise 
he is asking for, and I am going to ask for all of this to be summed 
up in about a minute-and-a-half. We have a timing constraint. 

Mr. Weldon of Pennsylvania. If they can put it in the record, 
also. 

Chairman Leach. Those are tremendous questions. 

Mr. DE Borchgrave. Very quickly, Congressman. 

Chairman Leach. I know you will speak for the panel. 

Mr. DE Borchgrave. I can't, because I have learned from long 
experience, as you know, Mr. Chairman, that political forecasting 
has made astrology look respectable in recent years. But I would 
say they are all connected in one way or another with the people 
we consider bad guys. 

The Luzhkov-Primakov combination, no question that they won't 
be much of a change from what we see today. The only one that 
I think is totally clean is Mr. Yavlinsky of the Yabloko party. 

Chairman Leach. You have 30 seconds. 

Mr. Palmer. There is credible evidence that Mayor Luzhkov is 
head of one of the largest crime families in Russia. If we look at 
Mr. Putin, he, as I showed in my testimony, was part and parcel 
of looting the state; and he was involved in it for years, and then 
he was involved with Navatex. 

Mr. Primakov oversaw the use of the KGB to move the money 
out of the country, rebuffed attempts by the Duma to investigate 
it and then later said, oh, well, maybe we should form a committee 
to see where it went. I really don't see any honest faces on the hori- 
zon. 

Chairman Leach. Let me conclude then with a comment. 

Mr. Shvets concluded his original testimony in terms of arguing 
what we might do with the observation that if we strengthened our 
money laundering laws, that would be a great service to Russia, be- 
cause strengthening laws in the West becomes a deterrent for Rus- 
sians to bring their money out. In addition, it serves as a basis for 
future prosecutions by future governments, or even conceivably by 
current prosecutors. 

Now, I stress this because money laundering might seem to 
many as a modest legal dilemma, but underlining, money launder- 
ing is someone's accumulation of resources that may involve a very 
spectacular criminal activity, and so from money laundering you 
get a lens to see things. You also get the prospect of looking at 
other laws that might be violated. 

And finally, let me just observe that in terms of kleptocracy, we 
had a modest model on the world stage fifteen years ago in the 
Philippines where Ferdinand Marcos and his wife appeared to gar- 
ner a fortune in the several billion and possibly larger range. Upon 
their demise, the government of the Philippines had a basis to lay 
claim in some circumstances, and Western governments were will- 
ing to assist, including the Swiss. And I only stress this because, 
from a Russian perspective, I would go back to the point, if they 



108 

are going to allow capital to leave the country, they ought to make 
very strict restrictions that it only go into Western financial insti- 
tutions that may come under Western law, and there must be an 
end placed to these money center havens that are created for one 
singular purpose, and that is for illegal funds to be deposited and 
no other purpose that I can gather, other than lack of regulation 
and avoidance of scrutiny. 

And, therefore, it is incumbent upon the United States to lead in 
cracking down on money laundering as a technique to crack down 
on much more significant crime, and crime that has enormous im- 
plications for the national interest of the United States and world 
security. 

Let me thank all of you for your extraordinary testimony and I 
appreciate it very much. The hearing is adjourned, and we will 
meet tomorrow with another series of panelists. 

[Whereupon, at 5 p.m., the hearing adjourned.] 



RUSSIAN MONEY LAUNDERING 



WEDNESDAY, SEPTEMBER 22, 1999 

U.S. House of Representatives, 
Committee on Banking and Financial Services, 

Washington, DC. 

The committee met, pursuant to call, at 10:05 a.m., in room 
2128, Rayburn House Office Building, Hon. James A. Leach, 
[chairman of the committee], presiding. 

Present: Chairman Leach; Representatives McCollum, Roukema, 
Bereuter, Lazio, King, Royce, Metcalf, Barr, Kelly, Cook, P. Ryan 
of Wisconsin, Biggert, Terry, Green, LaFalce, Vento, Waters, C. 
Maloney of New York, Bentsen, J. Maloney of Connecticut, Sher- 
man, Lee, Goode, Inslee, Moore, Gonzalez, S. Jones of Ohio, 
Capuano and Forbes. 

Chairman Leach. The hearing will come to order for a second 
day of hearings on this precise subject, but fourth or fifth day of 
hearings in the last year-and-a-half on Russia. And I would like to 
just address a couple of philosophical issues that may seem a little 
out of sorts in the context of specific actions of specific individuals 
or companies. When you think about it, for most of this century the 
world has been engaged in a battle between communism and cap- 
italism. That battle has been put aside, if not the West having 
largely prevailed, although there is some question now, the Cold 
War being over, whether the peace has been won. 

But it strikes me the new great antagonism in the world today 
is between capital systems that operate under the rule of law and 
those that operate outside the rule of law, and what you have here 
as we look at Russia is a society in which free markets are develop- 
ing, but they are developing in such a way that there is a lawless- 
ness. In fact, as one of our witnesses yesterday indicated, law ap- 
plies to the poor and contacts apply for the rich. 

Interestingly, philosophically in communism there are two great 
flaws in Marxist philosophy. One was the view that history was 
based on a march in which individuals weren't necessarily account- 
able, because historical forces were the dominant forces, and you 
have a class struggle, both of which I always thought had virtually 
no basis in reality of either history or philosophy. Although iron- 
ically in the circumstances developing in Russia today, we have un- 
Marxist elements that are tied to these theories; that is, you have 
a new class that has been put in power that is a class that has 
never existed in world society in a like manner before, and this 
new political power class has now come to control instruments of 
economics. I don't believe personally that any society can long 

(109) 



110 

stand in which very few control all the wealth and the very many 
have virtually no opportunity. 

And so by a virtual accountability sense, there is real question 
of whether democracy can hold in this kind of circumstance, and 
I believe that we in the West have an obligation to cease standing 
up for governments in power and start standing for people and 
their plights, and that what we should be doing in the West, led 
by the United States, is identifying with the Russian people, not 
with their leaders. 

In this regard, when it comes to international finance, I don't 
think you can walk away in Russia. On the other hand, when you 
look at any institution like the IMF, which give large macro-eco- 
nomic adjustment programs to central banks that are not perfectly 
accountable, and which, it appears, have been leading in social 
theft, one of the questions is, "Is it justified for the United States 
to support IMF lending to Russia at this time?" I think this is very 
dubious. 

On the other hand, there is a second great institution of inter- 
national finance called the World Bank, which is what might be de- 
scribed at the micro level instead of the macro level of economics, 
and I personally think we ought to be giving emphasis to World 
Bank assistance to Russian people, perhaps having World Bank 
contract out with Western banks or community-oriented financial 
institutions instead of state-controlled, monopolistic enterprises so 
that money can flow for economic development for the sake of the 
Russian people. 

In any regard, today we have a series of witnesses who will talk 
about the issue of crime in Russia and the issue of money launder- 
ing, and one example of significance from an American banking 
perspective of the possibility that will reveal, shed light on how 
funds from Russia come into the Western banking system, whether 
they be perfectly legally from a Russian or American perspective or 
with some questions as to their propriety. 

[The prepared statement of Hon. James A. Leach can be found 
on page 347 in the appendix.] 

At this point, let me turn to Mr. LaFalce for any opening com- 
ments he might have. 

Mr. LaFalce. Thank you very much, Mr. Chairman. I think 
these hearings are extremely important. About a decade or so ago, 
it became obvious to the world that we were witnessing a great mo- 
ment in history, a moment when a transition would take place, a 
transition from Communist states, with centrally planned econo- 
mies, to something else. Some people, they thought they knew what 
that something else would be, but nobody really knew for sure. 
Many people say, "Well, we are going to go from communism to 
capitalism." That is much too simplistic; but, of course, there are 
difficulties with both. 

I am often fond of reading encyclicals of Pope John Paul II, and 
he will condemn the evils of communism and give solace to us of 
the United States sa3ang, "Aha, we are right." But he will also con- 
demn the potential evils of the capitalistic system, too, which ought 
to make us stand up and say, "Well, now, wait a minute, you know, 
you have to be careful. If you are going to have a capitalist econ- 



Ill 

omy, you have to have certain rules and regulations that are fair, 
that are enforceable," and so forth. 

And whatever your political system, whatever your economic sys- 
tem, there is something that must always be central, and that is 
not something in the abstract. It is not a bunch of figures, budget 
deficits, budget surpluses, GNP growth, GDP, whatever it might 
be. The most important concern of all individuals should be the 
condition of the human being, the condition of the human being 
within the United States, the condition of the human being in Rus- 
sia, condition of the human being in Mexico, and so forth. 

And so whatever policies we adopt as a Nation, our first question 
should be how will this affect people in our own country, and be- 
cause things, what we do, have ramifications elsewhere, how will 
it affect people elsewhere. We are especially obligated to ask that 
question, how does it affect people elsewhere, when we take action 
within multilateral institutions, whether that is the IMF, the 
World Bank, European Bank for Reconstruction and Development, 
InterAmerican Development Bank, you name it. 

I don't think that we have had before us on all occasions the cen- 
trality of human beings and their condition in the actions we have 
taken. I think also that we have so glorified capitalism that we 
have not been mindful enough of its problems, and we clearly have 
not been mindful enough of the problems that can so easily come 
about in making a transition from one type of system to another, 
the transition from communism to a basically capitalist economy. 
That is why I was so concerned going way back to the early 1990's, 
introduced legislation that was passed that created the Central Eu- 
ropean Small Business Commission, so that we could help develop 
a small business sector in these formerly Communist states. It did 
excellent work, in my judgment, but then we couldn't get it reau- 
thorized and reappropriated. That is why I was so concerned. 

I thought the most important phenomenon taking place circa 
1993, 1994, 1995 to 1996 was the phenomena of privatization. We 
were witnessing privatization on a scale and in a manner that had 
been unknown to the world, and we would either do it right, or we 
would let this golden opportunity slip through our hands. In large 
part we let a tremendous amount of opportunity slip through our 
hands, we being a lot of people. World Bank, the private consult- 
ants. United States, European Bank for Reconstruction and Devel- 
opment, and so forth, and so much of the privatization went then 
to the benefit of a relatively small handful of individuals, either le- 
gally or illegally. That is one of the difficulties is so much of this 
was done under the color of law. 

So what do we do? Well, we do what we can right now, learn 
from what we did or didn't do right and wrong; examine our laws, 
most especially our money laundering laws, to see if the laws are 
good, if the laws are being enforced, and if they are not being en- 
forced, why not, and if they are good, but could be better, how so. 
Then, of course, we have individuals such as the Justice Depart- 
ment which look at criminal issues, and we have to be careful to 
what extent Congress works compatibly with criminal investigators 
so that nothing we do serves to be or proves to be counter- 
productive, and I am always mindful of that. Anything we do I 



112 

want or the Chairman wants to be productive rather than counter- 
productive. 

So some of those are my initial thoughts. This is an important 
hearing. I look forward to hearing from you, Mr. Robinson, and all 
of the witnesses scheduled today and those witnesses that will be 
brought in the future. 

Chairman Leach. Mrs. Roukema. 

Mrs. Roukema. Thank you, Mr. Chairman. I will limit my intro- 
ductory remarks here and just express my regrets to everyone that 
I couldn't be here for most of the hearing yesterday. I heard the 
third panel, but as you know, we were experiencing Hurricane 
Floyd disaster in two of my counties in northern New Jersey and 
I had to meet with the Director of FEMA, James Witt, who had 
flown in early yesterday morning, and the Governor of the State in 
order to assess the damage and set up lines of communication and 
organization to deal with the flooding problems. I am happy to say 
that things seem to be under control. 

I will however be reviewing the testimony of yesterday. I want 
to express my extreme appreciation, Mr. Chairman, for the fact 
that you are taking up these subjects; not only the foreign policy 
components, but also and most central to our committee are the 
questions of money laundering. As you know, I have held some 
money laundering hearings, way back in April, and have proposed 
legislation, the Bulk Cash Smuggling Act. I believe these hearing 
expose what is being done in terms of money laundering, and what 
should be done in the United States as well as what should be 
criminalized and how we should have the law enforcement commu- 
nity react. 

But more importantly than that is the fact, Mr. Chairman, that 
you introduced just this week, yesterday, and I am very happy to 
be a co-sponsor of that legislation, the Foreign Money Laundering 
Deterrence and Anticorruption Act. Mr. Chairman, there is great 
need for this legislation. I think the need for stricter money laun- 
dering laws is is being demonstrated clearly by these hearings. 
Certainly my questioning today will focus on whether or not we 
have learned enough from this particular tragic experience with 
Russia and the Bank of New York to determine whether the legis- 
lation, based on this experience, will be sufficient and comprehen- 
sive enough. 

I think we are going to learn some excellent things today. I 
pledge, Mr. Chairman, that with the full knowledge of these com- 
mittee hearings that we can, and should, all move together, hope- 
fully in a bipartisan basis, to expedite the movement toward enact- 
ing money laundering legislation this year. I certainly look forward 
to what we can learn from our panelists today to help us achieve 
that purpose. Thank you, Mr. Chairman. 

[The prepared statement of Hon. Marge Roukema can be found 
on page 356 in the appendix.] 

Chairman Leach. Well, thank you, Mrs. Roukema. 

Mr. Vento. 

Mr. Vento. Thanks, Mr. Chairman. I don't have a prepared 
statement. I want to again recognize the importance of this series 
of hearings with this new focus on the transactions of cash flow 
from the Soviet Union and from other countries I suppose it could 



113 

be expanded to. We are obviously looking at this and I think in sort 
of a myopic way when we look only at the financial institutions 
here and perhaps not looking at what happens in bond markets or 
what happens in other equity markets that are taking place if we 
really want to follow the entire flow of the capital. 

Mr. Chairman, I heard in some of the comments of yourself and 
some of my colleagues there was debate over the IMF, whether we 
are going to look at simply the market-oriented forces of the condi- 
tions and requirements that the IMF attempts to personify in pro- 
viding some of the key loans that are made upon which many other 
loans and financial arrangements depend, looking upon that and 
whether or not we are going to look at what the human condition 
is, and of course we hear this from our friends. 

Of course, I have been advocating or attempting to look at the 
human rights questions broadly insofar as they affect countries 
with regard to Asia and certainly with the World Bank and its sis- 
ter institution. That sister institution, that is what its primary 
focus is, but invariably the other 180 nations that are members of 
the International Monetary Fund don't always take kindly to the 
U.S. view of culture and various rights of individuals. 

And so I think we have to be aware of that phenomenon and 
what the limits are, but I think it could come to and should come 
to an agreement. I don't think that a sustainable free-market econ- 
omy is sustainable based on an undemocratic or grave social injus- 
tices that are embedded in some of the member countries that we 
are attempting to deal with that have severe financial problems 
and need sort of the financial architecture and the keystone posi- 
tion that the IMF puts in place in those instances. 

Mr. Chairman, furthermore, of course, as we look at our own in- 
stitutions and how they can indirectly help a nation such as Russia 
that is emerging and has an evolving market system, one that obvi- 
ously has come without the institutional memory from a centrally 
controlled economy, with all the other adjectives that are added to 
its demerits, in looking at how we can assist, there has to obviously 
be the will and the recognition within the country of the necessity 
of the actions that we may take. And doing these, as I said, in a 
myopic way just within the United States simply transfers, as has 
often been pointed out, these activities to other banks, to other fi- 
nancial entities globally. 

So I don't know the answer. I appreciate that some are risking 
putting forth solutions very quickly, including yourself, Mr. Chair- 
man, and I think that it is a positive effort that is being made. We 
obviously need to learn many of the aspects of this and whether or 
not we can achieve agreement with the other financial entities and 
policymakers on an international basis, including, I think — and 
Curt Weldon's comments were, I think, well placed — in not relying 
simply on the one personality or one leader in Russia, but relying 
on and trying to establish better relations with other government 
and state institutions, including the Duma, in Russia. 

Mr. Chairman, I am pleased to see our former colleague Senator 
DeConcini is present. I wanted to put you in New Mexico for a 
minute, Dennis, but I know that he has maintained in this and ob- 
viously is working and representing some of the witness/clients 
that are present today. 



114 

Mr. Chairman, thank you. 

Chairman Leach. Thank you, Bruce. 

Does anyone else seek recognition? 

Mr. Lazio. 

Mr. Lazio. Thank you, Mr. Chairman. Just briefly I just want to 
make two remarks. First of all is again to emphasize the fact that 
it is important for us to make some assessment about American 
complicity in the crisis in Russia. Everything ranging from the dra- 
matic increase in poverty from about two million people to sixty 
million Russians living in poverty, a tremendous health crisis that 
is occurring now that is unseen in even some Third World coun- 
tries, a dramatic increase in alcoholism among Russian males, the 
diplomacy between America and Russia that can at best be charac- 
terized as chilling, an economy that is now roughly the size of Den- 
mark, and how this all happened and whether Russia will look 
back upon this and say America could have done better and needs 
to do better. 

I want to make a personal remark about Tom Renyi, who is testi- 
fying today, the CEO. They are obviously in a difficult position, but 
I think it is extraordinarily graceful of him, frankly, as a CEO to 
be here and to answer these questions, and I think it shows great 
leadership at the CEO level for an important institution in New 
York. 

Chairman Leach. Thank you very much. 

Mrs. Kelly. 

Mrs. Kelly. Mr. Chairman, I have a statement, but in the inter- 
est of time I would like to have unanimous consent to insert it in 
the record. 

Chairman Leach. Without objection, so ordered. 

Mrs. Kelly. Thank you. 

Chairman Leach. Mr. King. 

Mr. King. Thank you, Mr. Chairman. I don't have any formal 
opening statement. I just want to commend you for initiating these 
hearings. They certainly go to the heart of the issues that could 
have both criminal and foreign policy implications. So I look for- 
ward to listening to the testimony here today. 

I regret I could not be at the hearing yesterday. I was at the 
U.N. for the opening of the session, but certainly from what I have 
read and from what I have seen in going over the testimony, it 
seems to have been a very productive hearing, and along those 
lines, I want to commend you also for the legislation you have in- 
troduced. I intended going on as a co-sponsor yesterday, but I was 
not here. 

I look forward to the testimony today, and again, these do go to 
the heart of very, very significant issues which have criminal and 
foreign policy implications, and I commend you for having the ini- 
tiative to bring this forward. 

Chairman Leach. Thank you, Mr. King. 

Mr. Ryan. 

Mr. Ryan. Thank you, Mr. Chairman. This issue is something 
that I think we are going to learn quite a bit about. We have a lot 
to learn, but as we look at these things, as we look at the news- 
paper accounts and the testimony from the witnesses, it seems to 
me that the problem with our policy toward Russia is not so much 



115 

a coddling and coping with organized crime units at the highest 
level in Russia with respect to our U.S. Administration's policy as 
much as it is a high-stakes crap shoot policy of picking the only 
route we think that is safe for Russian policy in supporting the 
Yeltsin administration and going to the point of denying and not 
wanting to know any other information. 

I think we are finding, and we are going to find, that our Rus- 
sian policy is basically that as we heard from the testimony of oth- 
ers. 

The concern that I have — and the pleasure that it is to see that 
we have several members of the Duma here with us today, which 
I would like to welcome on behalf of Curt Weldon, who I know is 
not here, is this. It is my concern that the people in Russia think 
that Western capitalism is cronyism. The people in Russia think 
that Western capitalism is those who have the assets and the 
power are the ones who survive, but I would like to send a message 
to the people of Russia, and I think Congress should send a mes- 
sage to the people of Russia that that is not what we see as demo- 
cratic capitalism. 

What we see as democratic capitalism is this: You are bound only 
by your God-given talents and your own effort. That is what cap- 
italism is. Capitalism is an asset. It is not cronyism. Capitalism is 
liberalization of the market and everybody having a stake in soci- 
ety and moving forward based on the core premise of the rule of 
law. That is what capitalism is. That is what we believe capitalism 
is, so that when you go to your bank, you know that your money 
is safe. That is something that people don't enjoy in Russia today. 
It is very foreign to us here in America. We know our money is safe 
in the bank, but they don't realize that their money is safe in the 
bank in Russia. 

So it is a message that I think is very important for Congress 
to send to the people of Russia is that we want to see real capital- 
ism flourish in Russia. That is what these hearings hopefully will 
come about. Hopefully we will have a shift in American policy on 
behalf of the people in Russia, on behalf of real capitalism and the 
rule of law, and hopefully that is the good that will come out from 
all of the bad things we are going to be hearing over the next cou- 
ple of months. 

Thank you, Mr. Chairman. 

Chairman Leach. Thank you, Mr. Ryan. 

If there are no further opening statements, let me welcome — ex- 
cuse me, the gentleman from Washington. 

Mr. Metcalf. Thank you very much, Mr. Chairman. 

Money was allocated for relief of people in these vast trans- 
actions. I am deeply concerned about the apparent problems of 
money laundering. Eight months ago I was in Russia, and we met 
with people that were in need, and I now thank the Chairman very 
much for holding these hearings and saying if wrongdoing or cor- 
ruption or personal gain has been involved in this scenario, then 
dramatic action is absolutely essential. 

Thank you, Mr. Chairman. 

Chairman Leach. Thank you, Mr. Metcalf. 

If there are no further opening statements, let me welcome to our 
committee, I think for the first time, James Robinson. Mr. Robin- 



116 

son is a Michigander. He is a former United States Attorney, and 
he is currently the Assistant Attorney General in the Criminal Di- 
vision of the Department of Justice. 
Mr. Robinson, please proceed. 

STATEMENT OF HON. JAMES K. ROBINSON, ASSISTANT ATTOR- 
NEY GENERAL, CRIMINAL DIVISION, U.S. DEPARTMENT OF 
JUSTICE 

Mr. Robinson. Chairman Leach, Ranking Minority Member La- 
Falce and Members of the committee, I want to thank you for this 
opportunity to discuss the nature and scope of the threat posed by 
Russian organized crime groups and the steps the Department of 
Justice is taking to combat that threat. 

In preparing for my testimony today, I have prepared a written 
overview of the problem of organized crime in the United States 
emanating from the former Soviet Union. I have also discussed 
some of the measures law enforcement has been engaged in to com- 
bat international organized crime in general and Russian organized 
crime in particular. I have given a copy of these written remarks 
to the committee, and to expedite the proceedings. 

Chairman Leach. Without objection, your full statement will be 
placed in the record. 

Mr. Robinson. I will summarize some of the key points and then 
answer the questions the committee Members may have to the best 
of my ability. 

Before I do so, I would like to take this opportunity, however, to 
express the appreciation of law enforcement for the assistance pro- 
vided to it by this committee over the years and as recently as this 
week in assisting law enforcement in providing it with the tools we 
need to combat money laundering. Making efforts to assure that 
crime does not pay and being able to identify and prosecute illegal 
activities through the money laundering statutes is among the 
most effective ways of combatting criminal activities and deterring 
criminal conduct. 

As stated in the Chairman's letter inviting me to be here today, 
I know that much of what you are interested in involves recent al- 
legations that appeared in the press involving possible Russian 
money laundering at the Bank of New York. However, it would po- 
tentially prejudice the criminal inquiry currently under way to dis- 
cuss that investigation in great detail or what has been uncovered 
so far, and I obviously have limited ability to do that. I can, how- 
ever, give you a general idea about the investigation, how it has 
been structured, and I will be happy to do that. 

The inquiry into suspicious transactions at the Bank of New 
York is being conducted by agents of the Federal Bureau of Inves- 
tigation's New York field office, and with prosecutors from the 
United States Attorney's Office for the Southern District of New 
York. Analysts from the Federal Reserve Bank of New York and 
the Internal Revenue Service are also working with this investiga- 
tive group. 

This has been and will continue to be an exceedingly complex in- 
vestigation. The volume of transactions passing through a major 
United States bank on any single day is simply staggering, and 
money laundering investigations necessarily involve painstaking 



117 

research of these many transactions. Significant investigative re- 
sources have been and will continue to be expended in an effort to 
ensure that we uncover the entire story and bring any merited 
criminal charges for violations of United States law. 

Last week as part of this inquiry, I and other prosecutors and 
agents met with a team of Russian law enforcement officials in 
Washington. We discussed ways we could cooperate consistent with 
applicable law and our respective law enforcement policies and 
practices, and we agreed on improved procedures to secure nec- 
essary assistance in conducting this investigation. 

I should also note that except possibly in terms of volume and 
number of transactions, this matter has many of the same charac- 
teristics as numerous other cases we encounter with some regular- 
ity. I regret that I will be unable to discuss those matters in great- 
er detail at this time because of the severe limitations and restric- 
tions that prevent us from commenting in public on pending crimi- 
nal investigations. We are also sensitive to a number of policy con- 
siderations, a sensitivity which I know is shared by Members of 
this committee, which make us extremely reluctant to make public 
comments on a case even in situations where we might arguably 
be able to do so should we choose. 

Among those policies is the need to protect the identity and safe- 
ty of witnesses. Premature disclosure of an investigation can cause 
subjects of that investigation to destroy or alter or manufacture 
evidence and could deter witnesses from coming forward. Also of 
very serious concern to those of us in this country is the need to 
prevent unfair damage to reputations that would result if we were 
to prematurely accuse people of committing crimes that may never 
be charged. 

I have a few other remarks that I would be happy to finish. 

Chairman Leach. The red light doesn't apply to you. You are 
free to proceed at some length, Mr. Robinson. 

Mr. Robinson. Thank you. 

I would also like to make the point that in complex, fast-moving 
matters such as this one, there is a very real danger that any com- 
ment that I might make on day one of a matter could be rendered 
inaccurate by new evidence discovered on day two, and that is an- 
other reason for great circumspection with regard to comments on 
an ongoing investigation. 

With respect to the general problem of Russian organized crime, 
I note by way of background, that since the fall of the Soviet 
Union, Russian criminal groups have become more open, more or- 
ganized and more powerful, and have a more powerful influence on 
Russian society. Of particular interest to today's discussion is the 
role that Russian organized crime groups may be playing in the 
massive outflow of capital from the former Soviet Union. Clearly 
billions of dollars are flowing out of Russia to foreign bank ac- 
counts. These outflows resist comprehensive analysis. Some of the 
activities may result from Russian individuals and businesses 
sending their legitimate assets abroad for safekeeping. Some could 
involve Russians conducting business with Western companies and 
paying for Western goods. Neither of these activities are per se ille- 
gal under United States law; however, the activities could involve 
violations of Russian currency, tax or other laws. 



118 

We believe that Russian organized crime groups are using West- 
ern financial institutions to launder the proceeds of their own ille- 
gal activities in Russia. We further believe that Russian organized 
crime groups assist Russian businesses and individuals in moving 
assets out of Russia in a manner that attempts to evade the scru- 
tiny of Russian law enforcement and tax officials. Because the 
United States does not want to become the world's repository of for- 
eign criminal proceeds, we must continue to combat Russian money 
laundering and Russian organized crime activities generally. 

Our strategy in attacking Russian organized crime is embedded 
in the President's comprehensive International Crime Control 
Strategy issued in May of 1998, a copy of which I am sure many 
of you have seen. It has designated international organized crime 
as a national security threat and directed United States law en- 
forcement, diplomatic and intelligence agencies to intensify their 
international organized crime efforts. 

Additionally, the Department and other law enforcement agen- 
cies are significantly expanding our presence in other countries and 
building new relationships with foreign governments. At the same 
time, we are continuing aggressively to investigate and prosecute 
Russian organized crime activity that we discover in the United 
States. 

As of December 1998, the FBI alone had approximately 260 
pending investigations targeting Russian and Eastern European 
criminal enterprises. Our work in this area has already scored no- 
table successes, including indictments and convictions of significant 
Russian organized crime figures. Our prosecutions of Russian orga- 
nized crime cases are handled by United States attorneys around 
the country, in particular through the twenty-four organized crime 
strike forces. These cases are coordinated through the Criminal Di- 
vision, which also coordinates contacts with foreign authorities to 
obtain evidence and to extradite fugitives from abroad. The strike 
force model has worked extraordinarily well in combatting LCN ac- 
tivities in this country, and the close network of strike forces is 
well-suited to combat emerging forms of international crime such 
as Russian organized crime. 

I can say just as a footnote that a great deal has changed since 
twenty years ago when I was the United States Attorney for the 
Eastern District of Michigan. In those days it would have been, 
frankly, quite unusual for United States attorneys in this country 
and even members of the Criminal Division at Main Justice to 
have had the involvement to the extent that we have in inter- 
national criminal activities of all kinds in the narcotics area and 
many other areas. 

We feel we are making significant progress in dealing with Rus- 
sian organized crime and other international organized crime 
groups; however, some of the law and some of the resources we use 
to wage this effort, particularly in the area of money laundering, 
I think need to keep up with the developments and the techniques 
of international crimes being used by criminals. With the addition 
of some new legislative provisions of the type that the Chairman 
has introduced and some proposals that we have as well, we think 
that the fight against organized crime can be significantly en- 
hanced. 



119 

For example, under current U.S. law, in order to prove a charge 
of money laundering, we must allege and prove that one of the 
specified unlawful activities listed in the money laundering statute 
gave rise to the illegal proceeds, but only a very limited number 
of foreign offenses now qualify as specified unlawful activities, and 
I am delighted that the legislation that has been introduced — and 
we are in the process of looking at that — introduced by the Chair- 
man, addresses those issues. 

Thus, the legislative provisions contained in these various pro- 
posals and some that will be shortly submitted to Congress by the 
Administration as the Money Laundering Act of 1999 would add 
additional foreign crimes such as fraud to the list of permissible 
specified unlawful activities for U.S. money laundering charges. 
Other provisions in the Money Laundering Act of 1999 would make 
it easier for Federal prosecutors to gain access to foreign business 
records and enhance our ability to prosecute money transmitters 
who knowingly accept criminal proceeds. 

We look forward to working with this committee on these impor- 
tant improvements to our money laundering statutes, and again, 
we appreciate the fine work of this committee in assisting law en- 
forcement as we move into the 21st Century where we will increas- 
ingly need to address issues of international organized crime. 
Thank you very much, and I will be happy to try to answer any 
questions. 

[The prepared statement of Hon. James K. Robinson can be 
found on page 359 in the appendix.] 

Chairman Leach. Thank you, Mr. Robinson, and I would also 
point out to members of the panel that Mr. Robinson has a very 
impressive opening statement that he has submitted for the record 
that is of a more general nature rather than a specific case nature, 
but I think is very, very helpful. 

Let me in terms of opening comments say that, as you know, we 
are looking at a particular case, and when you have cases, there 
are sometimes back-biting that occurs, and the British Govern- 
ment, for example, the Financial Times has reported, actually went 
to the White House with concerns that our law enforcement au- 
thorities were moving too slowly after information that it had pro- 
vided to precipitate the case. We have an article in a major publica- 
tion yesterday indicating that the British National Crimes Squad, 
as well as the Department of State, believe in the New York bank 
case that movement has been slow. 

And so the question I have is not so much a criticism, but can 
you assure this committee that all requisite efforts of the United 
States Government will be marshalled on serious money launder- 
ing cases of this nature? 

Mr. Robinson. I can assure the committee that that is the case. 
The Federal Bureau of Investigation has very close working rela- 
tionships, as do members of the Department of Justice, with our 
foreign counterparts. As you know, in an investigation of an inter- 
national money laundering case, that is very important to have 
close relationships with and to secure information from a whole 
host of other countries, and I can assure you that we are working 
closely with our international partners in addressing these matters. 
It is being done rigorously and effectively, and I think, as you point 



120 

out, from time to time there are tensions between different agen- 
cies of government, and we need to continue to work hard to see 
to it that those don't get in the way of doing an effective, expedi- 
tious job. 

Chairman Leach. Fair enough. 

Now, yesterday another major reporting agency from the press 
indicated that Swiss authorities have expressed a desire to help the 
United States in the case under review today, but that to help the 
United States, a formal request has to be made to Swiss authori- 
ties, and such a request has not been made. Is that something the 
Department is prepared to address? 

Mr. Robinson. I can address it in this way, and that is to assure 
you that there has been contact and will continue to be contact 
with foreign countries, including the Swiss and the Russians and 
other countries with whom we need to work. As the Chairman 
knows all too well, in order to successfully investigate a money 
laundering case, one needs to identify the source of the money and 
where it went, and to the extent these are international trans- 
actions, we need the assistance of our international partners. We 
have outlined in the submitted testimony the procedures that are 
available. One of the reasons for the meeting with the group from 
Russia was to make sure that the lines of communication were 
open there, and we are continuing to do that with other countries 
as well. 

Chairman Leach. That was my final question. You met last 
week with Russian counterparts to discuss issues of this nature 
and others, but how would you characterize the level of cooperation 
with U.S. law enforcement, and in particular, was this case raised, 
and did the Russians have any information that they wanted to 
share with you? 

Mr. Robinson. We had a general discussion. It was very produc- 
tive in terms of trying to clearly understand the different legal sys- 
tems we have in our two countries, the money laundering statutes 
here, the statutes that are available, the investigative techniques 
that are available, and the agents and the prosecutors did meet to- 
gether and tried to identify the kinds of information that needed 
to be shared. And this is obviously the kind of thing we try to do 
in any one of these investigations, and I know that we developed 
a point of contact that we hope will facilitate the exchange of the 
kind of information that is necessary to conduct a thorough and 
successful investigation. 

Chairman Leach. I appreciate that. I just want to conclude with 
this observation: Historically we have always thought the United 
States was the leading country in concerns for issues like money 
laundering and international financial institution issues related to 
bank regulatory enforcement. In this case, it appears that British 
authorities have been ahead of us, and I want to thank and com- 
pliment the British in this regard. In this case, based on one news- 
paper article, for the first time, to my knowledge, instead of us 
going to the Swiss and asking for them to be more forthcoming, 
they have been more forthcoming than we have. 

And second, the Swiss authorities, from a law enforcement per- 
spective, appear to have done a more politically-sensitive and more 
comprehensive law enforcement effort with regard to high officials 



121 

in Russia than the United States. And I would just simply express 
to you, first, that it is good news where Britain is today. It is good 
news how far Switzerland has come, and in a very competitive 
sense I hope American standards are not going to be second best. 
And so I would argue as strongly as I can that this is a very signifi- 
cant area of endeavor, and I would hope the Department of Justice 
would indicate to its subsidiary organizations, the Federal Bureau 
of Investigation and U.S. Attorneys, that this is an issue of true na- 
tional significance in a national interest way as well as in a law 
enforcement way, and this issue be prioritized, and I would just 
want to make it clear from a congressional perspective that I think 
that is the way we all feel. 

Mr. Robinson. I couldn't agree more, and I would only indicate 
on the subject of news accounts with regard to activities back and 
forth, with no disrespect to any members of the press who are here, 
we can't believe everything we read in the newspapers. 

Chairman Leach. Fair enough. 

Mr. LaFalce. 

Mr. LaFalce. Thank you very much. 

Mr. Robinson, I would like to get a better understanding of the 
enforcement mechanism that exists within the United States and 
internationally to deal with what we consider to be money launder- 
ing and with what other countries might consider to be money 
laundering, because obviously we are dealing with an international 
phenomenon, an international phenomenon that on the one hand 
crosses national boundaries, on the other hand, in the era of the 
Internet, knows no national boundaries, because you have transfers 
virtually at the speed of light or the press of a button. 

So I would like to look at the bodies of law, but mainly the struc- 
ture that exists within the United States and internationally. Tell 
me about FinCEN. Tell me about the role of the Justice Depart- 
ment and the FBI. Tell me about the interrelationship or coordinat- 
ing mechanisms you have with them and with the Federal Reserve 
and the OCC and with the State bank superintendents, most espe- 
cially the superintendent of banks for the State of New York, al- 
though there are others, and because of the international nature of 
it, what coordinating enforcement mechanisms exist internation- 
ally. 

Mr. Robinson. I think it is clear that it is more important than 
ever before that there be the kind of coordination that you are 
identifying. There are many actors. Obviously the regulatory re- 
gime that exists to try to identify suspicious activities brings those 
to the attention of law enforcement, to coordinate all of the actors 
in the law enforcement agencies of the Treasury Department, as 
well as the Justice Department and other components that are crit- 
ical. 

Because I don't want to take anything away from what I know 
will be an announcement tomorrow by the Attorney General and 
the Secretary of the Treasury with regard to the new money laun- 
dering strategy, I hope you won't mind if I don't go into the kind 
of detail that I expect will come out tomorrow in connection with 
this, but I can tell you that the Justice Department, the Criminal 
Division, has been working very closely with law enforcement in 
the Treasury Department, the Federal Bureau of Investigation, the 



122 

United States Attorneys' offices in developing this money launder- 
ing strategy that will be unveiled in some detail and comes as a 
result of the work of this committee encouraging this activity to 
occur. And I think that it will be an effective means of coordinating 
the various components, and I think the assistance provided by this 
committee and the statutes that you have been shepherding 
through will continue to assist us in that regard. 

Mr. LaFalce. That is it? 

Mr. Robinson. Well, as I say, I don't want to get ahead of my 
interference with regard to the strategy which I think is com- 
prehensive and discusses many of these areas, and I don't want to 
be getting ahead of my boss, the Attorney General of the United 
States, and the Secretary of the Treasury with regard to these mat- 
ters. I know there was some discussion by Secretary Summers yes- 
terday with regard to this, and this will be discussed in detail to- 
morrow. 

Mr. LaFalce. This is a preview of coming attractions. 

Mr. Robinson. Yes, indeed. 

Mr. LaFalce. All right. We will be there tomorrow. 

Let me go on. Does your office or does any United States office 
have a handle on the extent to which organized crime or criminal- 
ity was involved in the various privatization efforts within Russia? 

Mr. Robinson. I would think that that kind of information as to 
internal activities within Russia itself would be less likely, except 
in an indirect way, to come to the attention of U.S. law enforce- 
ment, whose primary responsibility, obviously, is the investigation 
and prosecution of violation of United States laws. We, as well as 
many others, are privy to a wide variety of intelligence information 
concerning much of this activity, but with regard to the internal re- 
lations of privatization in Russia, I wouldn't be the best person, I 
suppose, to give you that detailed analysis. 

We certainly see money flows, and as I indicated in my opening 
remarks and in the testimony that we filed, the extent to which 
these flows violate Russian laws is a subject that will require us 
to go and try to deal with our counterparts within Russia and to 
address some of the issues that are contemplated by the Chair- 
man's legislation with regard to expanding the number of specified 
unlawful activities that are contained within the money laundering 
statutes. 

Mr. LaFalce. Thank you. 

Chairman Leach. Mr. McCollum. 

Mr. McCollum. Thank you, Mr. Chairman. 

Mr. Robinson, it has been reported to us that yesterday was the 
first time the FBI contacted the Swiss Attorney General regarding 
the case that involves the IMF and the possibility of money laun- 
dering via the Bank of New York, and so forth. Is that true? 

Mr. Robinson. I think the answer is no. There are contacts 
throughout — we have constant contacts, frankly, with our partners 
in other countries, including the Swiss, and while I don't want to 
get involved in the specifics. 

Mr. McCollum. I don't want you to either, but are you prepared 
to assure us that that assertion to us is not true, that there were 
earlier contacts and have been earlier contacts? You don't have to 
go into details. I just want to know was yesterday the first time 



123 

or not that the FBI or the Department of Justice has been in con- 
tact by the Swiss on this matter. Have there been any earUer con- 
tacts? 

Mr. Robinson. My understanding is there have been earUer con- 
tacts, but just to make absolutely sure that did occur, I will double- 
check. 

Mr. McCOLLUM. Please do. 

Mr. Robinson. I will correct the record if I am mistaken. 

Mr. McCOLLUM. Thank you. 

To your knowledge, does Russia have a truly independent judici- 
ary? 

Mr. Robinson. I would say that the issue of the challenge for 
Russia with regard to the rule of law and the independence of its 
judiciary is a serious challenge. One of the things we do within the 
Criminal Division is to have a program of providing assistance for 
training prosecutors and police agencies. There have been discus- 
sions and I think needs to be continuing work with Russia with re- 
gard to their achievement of a rule of law. That would, I think, 
make an enormous difference to many of the issues that we are 
talking about here today. 

So my short answer, I guess, to your question would be I think 
there is a serious question as to the independence of the judiciary 
and the strength of the rule of the law. They are emerging and the 
Russians are working hard, I know, on these issues and on their 
constitution. 

Mr. McCoLLUM. Do the Russian law enforcement agencies have 
an effective program to combat internal corruption such as we have 
in our law enforcement agencies? 

Mr. Robinson. I certainly wouldn't indicate, based upon my 
knowledge, that it would be anything comparable to the kinds of 
thorough programs that we have here, and it is important that 
those be developed, I think. 

Mr. McCOLLUM. We have a very effective program with the Co- 
lombian National Police in Colombia where we have all the drug 
problems to theft. Their police officers, they have been very cooper- 
ative with us on this level, and that ability has been demonstrated 
that we, the United States, can, with the cooperation of a foreign 
government, do that sort of work, help them do that work. 

Is the level of relationship between United States Department of 
Justice and our program that you just mentioned in working with 
the Russians, is it up to the same par with that we have with re- 
gard to the Colombian National Police? Are we working with them 
to — have we established relationships to help them vet their police, 
or are they less cooperative them than the Colombians? 

Mr. Robinson. To the best of my knowledge, we have not been 
involved in this vetted unit concept. I will double-check. But I 
think we need to make the extraordinary expertise we have in this 
country available, and I think that there have been discussions on 
this subject and that there needs to continue to be discussions. Be- 
fore I took this job, I was the dean of a law school for five years 
and had a number of members I know of my faculty there, some 
who speak Russian who were involved in training programs for 
Russian prosecutors and judges. And I think that that kind of coop- 



124 

erative effort is one of the very important things that we can do 
in this country. 

Mr. McCOLLUM. It strikes me, Mr. Robinson, not only do we need 
cooperation, we need to have some force here when it deals with 
the International Monetary Fund, the loans we have made, how- 
ever our future relationships are with Russia, to make sure that 
they are willing to do this kind of detailed vetting that we have 
with relationship to Colombia, in that example I gave you, because 
that is the only way I think they are going to come around to 
issues like the money laundering and the corruption in this coun- 
try. 

At the same time I am asking this series of questions, I am curi- 
ous to know what your assessment is, what the Justice Depart- 
ment's assessment is of the extent of the Russian mob penetration 
of the Russian banking system? Do you have an assessment? Is 
there one at the Justice Department? How widespread, in other 
words, is the mob in control of Russia's banking system? 

Mr. Robinson. I think there are concerns. There have been some 
assessments done, but obviously our investigations are largely do- 
mestic, and I think much of the information that exists on this sub- 
ject is in the intelligence community and other places. And our in- 
vestigations, we don't have jurisdiction to investigate crimes within 
Russia itself. We have major concerns about it, some of which I 
identified in my written testimony. 

Mr. McCoLLUM. If I can, Mr. Robinson, I happen to sit on the 
House Intelligence Committee, and I know that there is a sharing 
of information that goes on, if there is an ascii, and we need co- 
operation between the FBI and the CIA and intelligence units. So 
I certainly hope and pray that you do have, you may not be able 
to reveal to us those details today, but you do have that informa- 
tion, and that in the process of assessing that, that you get to the 
bottom to the degree to which we can of where that corruption is, 
and that we as an Administration with the Attorney General tak- 
ing a lead on this, along with the Secretary of the Treasury, make 
some commitment to really get tough in our negotiations when we 
deal with our friends, and they are, I think, our friends. At least 
some of the leadership over there wants to be. But we have got to 
change the way they operate, they have got to change the way they 
operate, we can't do it alone. Obviously we need their cooperation. 

But we also can't do it, and they can't do it if we don't show them 
somewhat of the way and tell them that we aren't going to be able 
to have the kind of economic relations that are desirous that we 
have had up to this point in the future, if they are not going to 
shape up their system and get rid of this corruption. 

So I am very concerned that Justice is not carrying on as strong 
a policy role in this as it should. Even though I know the hand is 
out, it seems to me the carrot stick needs to be there, Mr. Robin- 
son. 

Mr. Robinson. I think that one of the things that PDD-42 and 
the International Crime Control Strategy makes clear is that we 
need to have this kind of close working relationship between the 
intelligence community, the State Department, and the Justice De- 
partment. We need to gather the kind of information you are talk- 
ing about and make our assessments. 



125 

And I would certainly agree that we do have a serious concern 
on the issue of the extent to which Russian organized crime groups 
are involved in the Russian banking system. I think it does present 
serious problems and things that we need to take a careful look at. 

Mr. McCOLLUM. Thank you. Thank you, Mr. Chairman. 

Chairman Leach. Thank you. Mr. Vento. 

Mr. Vento. Thanks, Mr. Chairman. Mr. Robinson, thanks for 
your testimony. I have looked over the summary of the legislation 
that you have proposed. It didn't quite ask what the Chairman has 
done, so I think we might want to try and reconcile some of that. 

You noticed in my opening comments that I alluded to the fact 
that we are dealing sometimes with bonds or with other types of 
instruments. Do you feel that, in fact, those disposal of assets in 
those particular circumstances, whether it goes to bonds, 
annunities, real estate, do we actually track those as closely as we 
do in terms of bank activities? 

Mr. Robinson. I am not sure we have the regulatory mecha- 
nisms to do in the same way, and that is why I think it is impor- 
tant to address those mechanisms, and I share the concerns that 
you have mentioned about the need to do that. 

Mr. Vento. I expect a lot of it gets back to some sort of a wire 
transfer to a bank, at least in terms of our nation, I don't know 
globally if that is true. But the concern is that in the work that 
you do, do you find that on occasions that if you are trying to trace 
money that it actually goes in those directions? 

Mr. Robinson. Absolutely. And I think the better capacity law 
enforcement has to try to identify those things the better able we 
will be able to do an effective job. 

Mr. Vento. One of the issues, of course, is that we are concerned 
that the specter of the IMF and World Bank that has been brought 
up and what happens to the assets or resources that go into them. 
There have been the discussion of tax evasion if various countries — 
obviously, the focus of the tension today is Russia — capital flight. 

Of course what you are talking about very often are assets and 
resources through banks that result in criminal activity. I notice in 
the convictions that you have had here, some is under the Hobbs 
Act, which is sort of a shakedown of immigrants and of transport- 
ing prostitutes from abroad, and going through some of these, some 
of these are just not identified as just money laundering and this 
Armenia issue that you raised. 

But in tracking what you are working here on is pretty much the 
illegally attained, you don't really make, there is no tracking of 
IMF dollars? Is that a specific role that you have? 

Mr. Robinson. A specific role of tracking IMF dollars? 

Mr. Vento. Yes. 

Mr. Robinson. Once they get to the Russia, you mean. 

Mr. Vento. However you do it. I understand that, you know, that 
dollars never get over there. According to the Secretary of Treas- 
ury, they are just sitting in Washington, and I understand that, so 
you have to — so I know you cannot do that, but I think that — is 
there any specific role that you have in terms of indirectly trying 
to determine — IMF dollars basically leverage a lot of other things 
that go on in these nations in terms of credit. Is there any role or 



co.fifiQ nn . s 



126 

monitoring role that we have, either as a nation or internationally 
in terms of monitoring these dollars? 

Mr. Robinson. Well, obviously from a law enforcement perspec- 
tive, before we begin to open a criminal investigation, we need a 
predicate, and so we are not out there searching around. But I do 
think that the regulatory agencies and others, through the sus- 
picious activity reports and other mechanisms, do provide early 
warnings for those activities that ought to be looked at by law en- 
forcement. And I think that is the kind of thing that we ought to 
do and then investigate those thoroughly. 

Mr. Vento. You know, you have some other issues that are going 
on here. The capital flight is one, where assets are being taken out 
of the country and deposited. I mean, these are concerns, because 
if we, through our national policy are trying to support the IMF to 
put dollars into Russia or other countries, we would like that those 
resources to stay there insofar as possible to better the economic 
and market goals that we have, to market oriented goals and some 
social goals that some of us might have. 

So we are concerned about issues of tax evasion, whether individ- 
uals are not paying taxes in Russia or doing things which bar it — 
which touch on evasion, but really with the laws you are looking 
at pretty illegal activities within the United States, not necessarily 
in Russia; is that correct? 

Mr. Robinson. I think to a large extent. There are a few speci- 
fied unlawful activities that involve foreign offenses as well, but I 
think that the kind of work that is being done by the committee 
to address the issue of expanding the number of specified unlawful 
activities that would be included in the money laundering statute 
would give tools to law enforcement that would enable us to really 
go after these things in a significant way and help us, and that is 
why our proposals address that. 

I know the Chairman's proposals address it as well. And we are 
looking forward to working with the committee to try to improve 
these to the point where we can address these kinds of issues. We 
are working in a very different world these days with regard to the 
amount of activity that the Justice Department is engaged in that 
has international implications. And this is one of a number of ex- 
amples, and I think these statutes, which are intended to accom- 
modate these changing dynamics, will be of great assistance to law 
enforcement. 

Mr. Vento. I mean it does involve monitoring, as we pointed out 
yesterday in testimony, that Russia exports both as an example as 
a country $80 billion worth of exports, so there is a lot of trans- 
actions that take place, and short of having financial entities across 
the board helping us with that and feeding us back the information 
there isn't much hope — I mean we can't begin to be the police force 
and law enforcement for Russia, can we? 

Mr. Robinson. No, I think we have enough to handle here, but 
we certainly need to interact with the consequences that occur 
there that affect the United States both directly and indirectly. 

Mr. Vento. It is sort of frustrating, I think it is like playing 
catch with a kid that can't catch the ball, and he doesn't throw it 
back to you, you know, it is kind of hard to do. And so I mean we 
really need cooperation in order to accomplish this end. And I think 



127 

while we are concerned with illegal assets and illegal activities 
here that there has to be an integrated policy with other nations 
and banks. 

I mean if we are willing to superimpose these requirements on 
us and others are not — for instance, picking on someone like the 
French, they tend to pick on us, so I shall pick on them — if they 
don't cooperate, then it obviously dissipates in a different direction. 
And even in the money laundering activity — or the capital flight, 
we are probably only talking about 20 percent of the export dollars, 
so it is not — there is still some good that comes out of what hap- 
pens here. It is a question of whether we are moving in the right 
direction, I think, here, not whether or not the system is perfect. 

Mr. Robinson. True. 

Mr. Vento. Thank you, Mr. Chairman. 

Chairman Leach. Thank you. 

Mrs. Roukema. 

Mrs. Roukema. Thank you, Mr. Chairman. 

In many ways, our questions have overlapped here. Certainly the 
questions I have heard from my colleagues are central to the ques- 
tions I have. But let me — hopefully without prejudicing or com- 
promising your investigation, let me ask the questions the way 
they have come to my mind. You heard me indicate in my opening 
statement that the Chairman has introduced legislation and, of 
course, the Treasury is going to have recommendations for legisla- 
tion tomorrow. 

But I am wondering, based on your experience and knowledge of 
the international problem here, and unfortunately I don't think we 
are going to find in the end that it is limited to Russia, there may 
be a more worldwide problem than we currently understand. 

The legislation that you know of, based on your experience thus 
far, what do you think is most central to the need for criminal re- 
forms? Are we closing the loopholes effectively in the legislation as 
you know it? 

Mr. Robinson. Well, I haven't had an opportunity to study the 
Chairman's proposals that were offered up I think yesterday. But 
I think that those are the kinds of things that we need to 

Mrs. Roukema. Aside from that, excuse me, aside from the 
Chairman's legislation, then what do you think we should focus on 
as the top priorities for closing the loopholes based on your own ex- 
perience? 

Mr. Robinson. We have a variety of proposals. I think one of 
those would be the extent to which in the money laundering area 
the specified unlawful activities are broadened. It seems to me that 
would be a significant assistance to us in law enforcement. 

I have tried in my written testimony to discuss a variety of those 
questions. But among the proposals would be to expand the list of 
money laundering, predicate crimes, to include a variety of things, 
including public corruption against foreign governments. And I 
think these would increase the availability of money laundering en- 
forcement tools to law enforcement; also broadening the definition 
of a financial institution to include foreign banks, closing a loophole 
that might exist there involving criminally derived funds, 
laundered through foreign banks doing business in other countries. 

Mrs. Roukema. You mean new definitions on that? 



128 

Mr. Robinson. Yes. 

Mrs. ROUKEMA. And also what are those, the banks that are able 
to get funds only from private payments and not include deposits 
from their own local citizens; is that right? 

Mr. Robinson. I think those kinds of issues are things that we 
certainly need to address. Also toughening penalties for violations 
of the International Emergency Economic Powers Act, the lEEPA. 
There are a variety of specific things that we have discussed and 
I think we will be continuing to discuss in terms of making these 
kinds of improvements. 

Mrs. RoUKEMA. Well, I would appreciate anything else that you 
could submit to us for the record with specificity, not only about 
our legislation, but based on your experience in various investiga- 
tions as to how we close those loopholes, if you have anjrthing be- 
yond your testimony. 

Mr. Robinson. We would be delighted to do that. 

Mrs. RoUKEMA. But it is also brought to my attention by staff 
that in an Administration briefing recently for staff, there was an 
indication that the most significant feature in the new strategy re- 
garding money laundering is an agreement between the AG and 
the Secretary of the Treasury to have their agencies work together 
to combat money laundering. 

That seems to be so elementary. Is there something more specific 
that you are talking about as to how you work together and cooper- 
ate with specificity that is not permissive or required under the law 
now? 

Mr. Robinson. I don't want to get ahead of the interference 
again. But the answer is, yes, I think those details will be dis- 
cussed tomorrow when this strategy is discussed by the Attorney 
General and the Secretary of the Treasury. 

Mrs. RouKEMA. Evidently it was not clear to some staff persons, 
and just on the basis of the way they presented it to me, that 
raised a question in my mind as well. So we will be looking at that. 

Mr. Robinson. Good. 

Mrs. RoUKEMA. All right. Thank you, Mr. Chairman. 

Mr. Robinson. Thank you. 

Chairman Leach. Thank you very much. 

Ms. Waters. 

Ms. Waters. Thank you very much. 

Mr. Robinson, I have been reviewing your statement, and I am 
particularly concerned about the laundering of drug money. 

Mr. Robinson. Yes. 

Ms. Waters. Coming from the Justice Department, you are 
aware of our mandatory minimum laws and the fact that the pris- 
ons are filling up with young people from inner cities, mostly mi- 
norities, who for 5 grams of crack cocaine can get a mandatory — 
a minimum of five years in prison, and the judge does not have any 
discretion. 

When I look at the laundering of drug money by our own domes- 
tic banks, and I have reviewed the 105 or so prosecutions over the 
past few years, I see that the fines have been given for some of 
these banks, one fine as high as $25 million for American Express 
International. I saw that Confia bank was on the list. That was one 
of the banks that was identified in the Casablanca operation. That 



129 

was a known drug money laundering bank that was under pur- 
chase at the time by Citibank. 

We have "know your customer laws" that are basically ignored 
by our own domestic banks. There are some reference to private 
banking, nothing about concentration accounts, and no one has 
ever lost a bank charter for laundering drug money. At the same 
time we give long sentences to low-level street dealers. Without the 
ability to realize the profits there would be no drug trafficking. 
They couldn't spend the money. It just wouldn't happen. 

What are you prepared to recommend? What get tough laws are 
you recommending for banks, and do you include in that the loss 
of a charter for banks that are convicted for the laundering of drug 
money? 

Mr. Robinson. I share the concerns that you have about the 
need for effective prosecution, not only of individuals who commit 
crimes, but financial institutions that commit crimes. I know that 
this has been a subject of discussion. And I had the opportunity to 
review and saw your testimony actually yesterday on this topic. I 
think that you raise very legitimate points, and I think law en- 
forcement needs continuous improvement in this area. 

As you know, in the submissions that we have given to you by 
one of my deputies and others concerning the work of the Depart- 
ment over the past ten years in this area, there has been a good 
deal of work, but that doesn't suggest that simply because there 
have been 105 foreign and domestic banks and financial institu- 
tions that have either been convicted of money laundering or penal- 
ized 

Ms. Waters. Excuse me, I don't want you to go any further. 

Mr. Robinson. Yes. 

Ms. Waters. That is the cost of doing business these days. 

Mr. Robinson. I understand. 

Ms. Waters. If you can keep doing business and you get fined 
and you are making money, you will pay the fine. Are you prepared 
for us to take away the charters of banks who launder drug money? 

Mr. Robinson. I think in appropriate circumstances that if peo- 
ple are engaged in criminal activity at that level, the forfeiture 
laws and others ought to be considered. I guess the short answer 
is getting tough in this area is appropriate. 

Ms. Waters. Are you prepared to recommend the loss of a char- 
ter under any circumstances where the laundering of drug money 
is involved? 

Mr. Robinson. I think yes under appropriate circumstances. The 
answer ought to be yes. 

Ms. Waters. Can you describe what kind of circumstance you 
think would be appropriate to snatch a charter? 

Mr. Robinson. I think if you had a financial institution engaged 
in knowledgeable money laundering at the highest levels of the cor- 
poration, that that was their business to engage in, that you didn't 
have a situation in which there were mechanisms in place to pre- 
vent this, where you have corporate compliance programs to see to 
it — we do encounter situations in which people, because of the tre- 
mendous economic advantages, get involved in this activity and 
hide their activity from other people and the institutions. That 



130 

doesn't mean that the institution shouldn't pay, but I think we 
have to look at these cases on a case-by-case basis. 

And in an appropriate case, it seems to me, it would be appro- 
priate to have the ultimate capital punishment for a financial insti- 
tution with regard to that. I think it depends on the specific case. 

Ms. Waters. Are you involved at all with the ongoing investiga- 
tion of Citibank? 

Mr. Robinson. I am familiar with it, yes. 

Ms. Waters. But it is still ongoing? It has not been concluded 
yet? 

Mr. Robinson. I obviously can't comment on the specifics of the 
investigation, however. 

Ms. Waters. I just ask. Is it still ongoing? 

Mr. Robinson. I think it wouldn't be appropriate to say anything 
other than there has been no conclusion as I understand it and the 
specific answer to the question, let me double-check and get back 
to you. 

Ms. Waters. Thank you. 

Chairman Leach. Mr. Lazio. 

Mr. Lazio. Thank you, Mr. Chairman. 

I just want to get, if I can, some understanding of the structure 
that is being used from a law enforcement point of view. Is it a 
task force that has been assembled, an interagency task force on 
the money laundering issue? 

Mr. Robinson. Are you talking about a particular case or 

Mr. Lazio. I will refer particularly to the Russian case. 

Mr. Robinson. The Bank of New York case, or whatever you 
want to call it? As I indicated 

Mr. Lazio. I presume it is broader than just Bank of New York. 

Mr. Robinson. Yes. As I indicated in my opening remarks and 
in the testimony that was submitted, the matter is being handled 
by the United States Attorney's Office for the Southern District of 
New York working with agents with the FBI field office in New 
York in conjunction with agents from the IRS and other regulatory 
agencies in coordination with the Organized Crime Racketeering 
Section of the Criminal Division at the Justice Department. 

To the extent that additional resources are deemed to be nec- 
essary, those resources, I think, will be assigned if that answers 
your question. 

Mr. Lazio. Not completely. In other words, is it a collaboration 
right now in sort of an institutionalized way with Treasury? Is 
there a collaboration in some type of institutionalized way with our 
intelligence services? 

Mr. Robinson. Yes. 

Mr. Lazio. In this task force? 

Mr. Robinson. Yes, the answer is yes. 

Mr. Lazio. And Treasury has FinCEN organization. Is that di- 
rectly involved as a representative of 

Mr. Robinson. What I wouldn't want to do is describe in great 
detail, in any more specifics than I have in the testimony, the spe- 
cific configuration of the investigation. 

Mr. Lazio. I am interested in whether FinCEN has been 
proactive and has been effective from a law enforcement standpoint 
and whether it is frankly worthy of additional scrutiny, and so I 



131 

will ask you this directly. How would you characterize up until 
today, because I understand there will be an announcement tomor- 
row, how would you characterize FinCEN's role in money launder- 
ing in general and in this particular case in particular? 

Mr. Robinson. Well, let me add, sir, that FinCEN is a very im- 
portant tool and I think it does a very effective job and works coop- 
eratively with the rest of Federal law enforcement. And I think it 
has a very important role in money laundering investigations, and 
the continued cooperation between all of these resources in the 
Federal Government will be essential to do an effective job. 

And I think they have been effectively engaged. Their resources 
are well-known to the rest of the law enforcement, and I think that 
obviously under the topic of continuous improvement, there always 
needs to be continuous improvement. But I think there has been 
good cooperation between Treasury and Justice with regard to 
these matters. 

Mr. Lazio. Yesterday we heard testimony from Fritz Ermarth, 
who is a former CIA official who headed the Russian — I guess chief 
Russian analyst. And he testified as to almost a culture, and that 
is my word, I don't think it was his, but a reference to the pressure 
not to pass on bad news to superiors, that intelligence would be 
gathered, but there would be a sense that people at the upper ends 
just did not want to hear it, because they were pursuing a strategy 
that was an announcement to some of this bad news. 

Have you had any experience with that? Had you heard of other 
people in American law enforcement who have expressed a concern 
about that? 

Mr. Robinson. I have not, although I did see some of the hear- 
ings last night. The Justice Department thrives on bad news. We 
are supposed to investigate it and so the extent to which we can 
get information indicative of the possibility of criminal activity, 
that is part of our job to look for that information, make a deter- 
mination as to whether the predicates are there for the possible 
violation of United States law and conduct a thorough investiga- 
tion. 

Mr. Lazio. OK. You also know, and I say this as a former pros- 
ecutor myself, not everything that is uncovered ends up being 
criminal. There is essential information that sometimes needs to be 
passed on so that polic3anakers can make informed decisions. 

Mr. Robinson. True. 

Mr. Lazio. So my question is to you, did you ever experience or 
hear of anybody who ever experienced a disinclination to pass on 
information to higher-ups, because it didn't fit in with the strategy 
that was being pursued from a political standpoint? 

Mr. Robinson. I haven't, but obviously my period of most recent 
involvement in this topic is about fourteen months since my ap- 
pointment to this position last June. 

Mr. Lazio. Thank you very much, Mr. Chairman. 

Chairman Leach. Thank you. 

Mr. Bentsen. 

Mr. Bentsen. Thank you, Mr. Chairman. 

Mr. Robinson, in your testimony, you talk about, on page 7, you 
talk about the increasing frequency of suspicious financial trans- 
actions. And you talk about prosecutions under Sections 1956 and 



132 

57 of Title XVIII, and 5324 Title XXXI, and on the following page, 
you list the charges that have been brought. It shows an increase 
in fiscal years 1996 through 1998. 

How does this compare to the previous three years? Has there 
been a pretty substantial step-up in the number of charges 
brought, and is this both domestic and international related? 

Mr. Robinson. These would include all prosecutions under these 
sections. And I will be glad to get the information on the years pre- 
ceding. But I would anticipate that we will see this number in- 
crease as we go forward. 

Mr. Bentsen. So the various U.S. Attorneys out in the field have 
been stepping up their activity based on the data that you showed 
here at least in the last three years. 

Mr. Robinson. I think that is true. And my understanding is 
that these numbers have been relatively consistent over the last 
five or six years. But we will double-check the specific figures. 

Mr. Bentsen. That would be helpful. Later on in your testimony, 
you reference the International Crime Control Act of 1998, a pack- 
age of more than 50 new legislative measures to help us fight inter- 
national crime and implement the objectives of the international 
crime control strategy. 

Now, apparently that passed the Senate, but was never taken up 
by the House in the last Congress, according to your testimony. 

Mr. Robinson. My understanding is that is correct. 

Mr. Bentsen. Was it ever taken up by the Judiciary Committee 
in the House, do you know? 

Mr. Robinson. Pieces of it have, as I understand, but not the en- 
tire package. 

Mr. Bentsen. Otherwise the Senate acted, but the House did not 
act. Would this be a helpful measure for U.S. Attorneys in the field 
and for the Justice Department and the international efforts to 
combat money laundering and organized crime infiltration of the 
Nation's financial system? 

Mr. Robinson. We believe it would be. 

Mr. Bentsen. There have been questions raised, and certainly 
raised to me primarily from the media, and there have been a 
number of reports in the media that the Bank of New York is en- 
demic of a situation where high levels in the Clinton Administra- 
tion have turned a blind eye toward organized crime and corrup- 
tion in Russia for furtherance of other goals, and some have said 
in the case of the Bank of New York, the blame lays at the door- 
step of the Vice President, because of being the point person on 
U.S. relations with Russia. 

My question to you would be, what is the standard operating pro- 
cedure involving an ongoing criminal investigation within the Jus- 
tice Department and notification? From testimony given yesterday 
by Secretary Summers, the Treasury policy officials were notified 
in April of this year, although, if I recall correctly, FinCEN officials 
at Treasury were engaged with the FBI and with Justice and the 
U.S. Attorney's Office in the Southern District of New York on this, 
as you would expect. 

But, would it be appropriate or inappropriate, in your opinion, 
for this to be an issue to be taken up to the high levels of the Ad- 
ministration so it could be used in negotiations, say, with a Rus- 



133 

sian prime minister, of concern within the Administration with re- 
spect to corruption, or would an ongoing criminal investigation be 
something that we would prefer to keep under wraps until a deci- 
sion can be made whether or not to bring charges or pursue a pros- 
ecution? 

Mr. Robinson. Well, we start with the proposition that we prefer 
to keep criminal investigations confidential for some of the reasons 
I identified in my opening remarks and I articulated in the written 
statement that I made. In addition, there are specific legal con- 
straints with regard to sharing information, particularly grand jury 
information under rule 6(e) of the Federal Rules of Criminal Proce- 
dure. There are specific prohibitions on the sharing of grand jury 
information. 

Having said that, increasingly these days and at the point that 
probably didn't exist, certainly didn't exist when I was a United 
States Attorney twenty years ago, because of the internationaliza- 
tion of criminal activities and the extent to which the Justice De- 
partment comes across information in the course of our efforts, 
there are situations in which we could come across information 
that is so important to the national security or foreign relations of 
the United States that it would be deemed appropriate to provide 
limited information, and so we have a process within the Depart- 
ment to try to flag that kind of information. 

Each United States Attorney's office was advised and has been 
reminded that, if during the course of investigations information 
comes to their attention of this type, we have to have a careful 
process of determining under what circumstances it rises to a level 
where it is appropriate, that it affects national security, that there 
ought to be notification to policymakers. 

So we would raise the matter up to the Attorney General, and 
a determination would be made as to the extent to which it would 
be necessary to share that information. So that is the process that 
is utilized, and it is a careful, I think, process that is designed to 
protect the integrity of the investigation while still not sitting on 
something that could affect the vital national security interests of 
the United States. 

Mr. Bentsen. With the Chairman's indulgence, based upon that, 
as a former U.S. Attorney and a high-level Justice Department offi- 
cial now, would it be in your opinion productive or counter- 
productive for information regarding an ongoing investigation to be 
divulged in international contacts; that is, for our negotiators with 
the Russians to bring up that, oh, by the way, we are investigating 
potential money laundering activities through a certain U.S. bank, 
we think this is a problem that you should be aware of and you 
should be addressing, or would that be counterproductive or pro- 
ductive to your ongoing criminal investigation? 

Mr. Robinson. Well, obviously, I wouldn't want to comment on 
the specifics or even a hypothetical basis. Let me say the answer 
this way, obviously — to the extent, we conclude through this proc- 
ess that there is information vital to the national security interests 
that needs to be shared with people that are engaged in carrying 
out that policy on behalf of the United States, the point at which 
those policymakers, based upon a much larger role and responsibil- 
ity for foreign relations and other things, determine how to use it 



134 

is something that I think that they would have to determine. Obvi- 
ously, we would prefer that any disclosures be only as necessary so 
that we can continue to protect the equities that I outlined in my 
written testimony and stated here. 

Mr. Bentsen. Thank you. 

Thank you, Mr. Chairman. 

Chairman Leach. Thank you. 

Mr. Royce. 

Mr. Royce. Thank you, Mr. Chairman. 

Part of our responsibility 

Chairman Leach. Could you hold just a second, Ed. Do you want 
a parliamentary inquiry? 

Ms. Waters. I would like to submit my statement for the record. 

Chairman Leach. Mrs. Waters has a unanimous consent to sub- 
mit her statement. Without objection, so ordered. 

Mr. Royce. 

Mr. Royce. Thank you, Mr. Chairman. 

One of our responsibilities here is to get at the facts. And one 
of the witnesses that we heard yesterday passed on the following 
observation: he says officials of one of our closest allies told him 
last spring that they are now monitoring their local Russian orga- 
nized crime problem very closely. And they say, further, 80 percent 
of the funds through Russian organized crime entering their coun- 
try first come into the United States; that they are laundered 
through the U.S.; and of those funds from the U.S., they say 60 
percent arrive from the City of Boston. However, when they ask 
U.S. police to provide information on the ownership of those ac- 
counts, it takes six to eight months to receive sketchy data. 

Further, the Russians close and change those accounts every six 
months. However, our allies are being assured that Boston has no 
Russian organized crime problem. 

Now, he says he will give us the names of policemen there that 
are willing to indicate differently. This is the question that we have 
been bringing up now. The Chairman held a hearing in June of 
1996 where we brought up this same set of issues, and I guess part 
of the concern that we have is not what Justice is going to do to- 
morrow, when you lay out a new program; the question is, what 
has been done over the last couple of years over a problem which 
is very serious? 

We have Duma members that come to us and in our offices and 
tell us, it is time for the legislature and the Duma to begin to work 
together on this information, because there is not enough being 
done in their administration or in our Administration in terms of 
investigating money laundering. 

The Russian delegation that was just here last week that met 
with you, they met with the Justice Department, returned to Mos- 
cow and said that they had not been shown any evidence that there 
was a legal problem with the Bank of New York. 

Now, is this what we call cooperation? I mean I would just like 
your response on that. 

Mr. Robinson. Well, we do require their cooperation, and there 
were meetings and there will continue to be meetings, not only 
with this group, but with other countries. We have mutual legal as- 
sistance treaties that have been outlined in my written testimony. 



135 

In the Office of International Affairs in the Criminal Division, we 
have people who work on a daily basis with our partners through- 
out the world. The FBI, DEA, and other law enforcement agencies 
have legal attaches. One of the things we are obviously expanding, 
because of the growth of international crime is the need to have 
people in place dealing with these different laws and different sys- 
tems in creating the kind of relationships where the shared infor- 
mation can occur to have mutual assistance between our two coun- 
tries. 

We obviously have to do it with some care with regard to what 
you share under what circumstances, what guarantees do you have 
that by sharing the information it is not going to be inappropriately 
used, and that means building the kinds of partnerships. And I 
think that the meeting that we had last week was helpful, the rela- 
tionships the FBI legatts have throughout the world. There are, as 
I indicated in the testimony, I think, 32 or 33 countries in which 
we have FBI legatts. And that needs to continue to improve. 

Mr. ROYCE. Be mindful of the fact it is the Duma that has passed 
a series of laws to make money laundering a crime in Russia, all 
right? Those have been vetoed by their administration. They are 
trying to get a signature on a law to make it a crime in Russia. 
They come here and meet with you to investigate this issue of 
money laundering with respect to these funds that went through 
the Bank of New York. 

They then return and have to say, "Well, we have been given no 
evidence, no information." I am just reporting to you, because we 
are hearing from delegations, from the Russian Duma, that indi- 
cate they are very upset with the amount of money laundering that 
has occurred in their country that has gone out of their country. 
They suspect a lot of it is going through banks here in the United 
States and then into the Caribbean, and so forth. 

And they are trying to get to the bottom of this. We are trying 
to get a signature, I assume, from President Boris Yeltsin of Russia 
on a bill to in fact make this a crime, and it would just be helpful 
if there was some cooperation with the Duma members. And they 
are telling us they are not getting that cooperation from more than 
one member of the Duma by the way. 

Mr. Robinson. I think that the cooperative relationship between 
U.S. law enforcement and Russian law enforcement is there. I 
think that there is a good relationship. I think the meetings we 
had were productive, and I think there will be further meetings be- 
tween law enforcement, to law enforcement with regard to sensitive 
information, and that exchange needs to occur. 

We also made the point during the meetings that we thought it 
was very important for the money laundering statute in Russia to 
come into place. And we had a discussion about that, had a copy 
and translated it, the veto message. And we are taking a careful 
look at that and urged them and made the point that we felt that 
money laundering statutes are critical here and would be very, 
very helpful and important in Russia as well. 

Mr. RoYCE. It would be nice with all the aid we have given Rus- 
sia if we would have at least leveraged that signature on that bill 
instead of the continued vetoes that we have gotten out of the Rus- 
sian administration. But I thank you for your testimony. 



136 

Mr. Robinson. I agree with you. 

Mr. ROYCE. Thank you, Mr. Chairman. 

Chairman Leach. Thank you. 

The gentlelady, please. 

Ms. Lee. Thank you, Mr. Chairman. 

Mr. Robinson, you indicate this in your testimony, that there are 
very Umited foreign offenses under the money laundering statute, 
you mentioned on page 4 trafficking in narcotics, murder, kidnap- 
ping, robbery, extortion, destruction of property by means of explo- 
sives and fraud against a foreign bank, OK. Because they are very 
limited offenses, is it safe for us to assume that there are or have 
been other instances of money laundering from other countries, 
other than Russia, that for whatever reason has not been exposed 
nor investigated, because of the lack of statutory requirements, is 
this really just the tip of the iceberg? 

Mr. Robinson. This problem is not a problem that is limited to 
the situation that we are talking about here today with Russia. We 
see it with other countries. We see it in a whole host of situations 
in our narcotics investigations and the like. So the topic of inter- 
national money laundering is a topic that spans the globe and will 
continue to be a subject that we have very serious concern for law 
enforcement. 

Ms. Lee. But how do you decide when to prosecute and when not 
to prosecute, given the very minimal statutory authority that you 
do have? 

Mr. Robinson. Well, obviously, we are bound by the statutes 
that exist, and so to the extent that we have specific credible evi- 
dence that we can find a violation of United States law as it cur- 
rently is configured, and understanding that our standard in the 
United States is to convict people beyond a reasonable doubt, we 
conduct those investigations and where we have the evidence, we 
bring the charges. 

Ms. Lee. Can you, just for my own information, indicate where 
there have been other instances of money laundering that would — 
I won't say rise to the level of this investigation, but would be a 
serious investigation that you have conducted or 

Mr. Robinson. Why don't I do this, rather than try to talk off 
the top of my head on this, is try to get back with specific informa- 
tion for you to supplement my testimony. 

Ms. Lee. OK, thank you very much. 

Thank you, Mr. Chairman. Thank you. I yield back the balance 
of my time. 

Chairman Leach. Mrs. Jones. 

Mrs. Jones. Thank you, Mr. Chairman. 

Mr. Robinson, I did not arrive at the time you began your testi- 
mony. Would you repeat for me what your current position is, 
please? 

Mr. Robinson. I am the Assistant Attorney General for the 
Criminal Division of the Justice Department. I was appointed last 
year and took office June 22nd of 1998. 

Mrs. Jones. To whom do you report, sir? 

Mr. Robinson. I report to 

Mrs. Jones. Directly report? 



137 

Mr. Robinson. I report to the Attorney General of the United 
States through the Deputy Attorney General of the United States. 

Mrs. Jones. Who is your deputy? 

Mr. Robinson. Eric Holder. 

Mrs. Jones. I just wanted to understand the relationship. And 
prior to serving in this position, what did you do? 

Mr. Robinson. I have been a lawyer for 30-some years. I was a 
partner in a major law firm in Detroit where I headed the litiga- 
tion department for many years. I was the United States Attorney 
for the Eastern District of Michigan in the Carter Administration. 
And for five years immediately before assuming my current posi- 
tion, I was the dean and a professor of law at Wayne State Univer- 
sity Law School in Detroit, Michigan. 

Mrs. Jones. Close to Ohio? 

Mr. Robinson. Yes. 

Mrs. Jones. OK. My background and experience is a former DA 
and a former judge. I sat here listening to the testimony yesterday, 
and I am sure you heard it over the television. It is very easy to 
sit here and speculate about what testimony is admissible or what 
isn't in a courtroom or to speculate and say hearsay, but you can't 
use that in a trial in a courtroom. Is that a fair statement, sir? 

Mr. Robinson. As it turns out, my principal area of scholarly at- 
tention is evidence and so I taught evidence for many years, and 
I have written a couple of books about it. And there is no doubt 
that there is a difference between hearsay, rumor, speculation, in- 
nuendo and what you can get into court. 

Mrs. Jones. For representatives of the Duma to go back to Rus- 
sia and publicly say that they have not had cooperation from law 
enforcement in the United States when they come over to complain 
makes for great television stories, doesn't it? 

Mr. Robinson. I am not sure how the press plays it. 

Mrs. Jones. Or the press. 

Mr. Robinson. I don't know. 

Mrs. Jones. Now, yesterday we also heard testimony that privat- 
ization of Russian banks cause the flow of funds from Russia to 
other countries, therefore, the United States should be responsible 
for the money laundering dilemmas in Russia as a result of push- 
ing for privatization. 

Have you found any evidence of that particular fact that would 
cause us to proceed with money laundering claims in this country? 

Mr. Robinson. Well, let me separate out a couple of things. I 
have seen the information that these privatization issues have re- 
sulted in a fair amount of capital flight out of Russia, some of 
which, as I indicated in my testimony, may be perfectly legitimate, 
and not a violation of any United States laws, some of which may 
constitute money laundering within the meaning of our statutes 
and each, of course, would require a very careful analysis of the 
transaction, identifying the source, determining whether the source 
was based upon a specified unlawful activity. This is a careful proc- 
ess that has to be built together before obviously anyone can be 
charged with violating Federal criminal law. 

Mrs. Jones. Just for the fact that money flows from Russia out 
to other countries does not necessarily mean it is as a result of any 
criminal activity? 



138 

Mr. Robinson. Certainly not necessarily a violation of United 
States criminal laws; whether it might or might not violate Rus- 
sian laws is another matter. If it was to be sent out, for example, 
to evade Russian taxes or otherwise, but that is speculation. 

Mrs. Jones. Would it be fair to say that a good analyst or inves- 
tigator, even if he had the feeling that the higher-ups thought that 
some information should be one way or the other, but if he or she 
was doing their job, they are obligated to provide good news and 
bad news? 

Mr. Robinson. I would assume that every manager wants all the 
information whether it is good or bad. I certainly do in my job, and 
I would assume others want all the information as well. 

Mrs. Jones. And the bad news is the news that could sting you 
in the behind in a courtroom if you didn't have it once you got to 
a courtroom on a particular case or analysis; is that a fair state- 
ment? 

Mr. Robinson, In a courtroom or before a congressional hearing 
or wherever. 

Mrs. Jones. Finally, Mr. Robinson, is it a fair statement to say 
that in the course of being a criminal — excuse me, an Assistant 
U.S. Attorney or an assistant U.S. Attorney Greneral, you provide 
not only civil, but also criminal advice to agencies in the United 
States; is that correct? 

Mr. Robinson. Certainly the Justice Department. 

Mrs. Jones. The Justice Department does. And there comes a 
time at some point wherein you may be providing civil advice to 
an agency and someone in the Criminal Division would be provid- 
ing criminal advice, and at some point it may be required that in 
order to be giving good advice civilly, some information may have 
to be provided criminally that would not necessarily impair an in- 
vestigation? 

Mr. Robinson. It sounds possible in the abstract, yes. 

Mrs. Jones. In fact, in reality, it could well happen as well? 

Mr. Robinson. Sure. 

Mrs. Jones. Thank you very much, Mr. Chairman. 

Chairman Leach. Thank you. Judge Jones. 

Mr. Capuano? 

Mr. Forbes. Mr. Forbes. 

Chairman Leach. Mr. Forbes. Excuse me, I am looking the 
wrong way, I apologize. 

Mr. Forbes. Thank you, Mr. Chairman. 

Thank you, Mr. Robinson, for your patience and for being here 
today. I think your information has been extremely informative, 
and as the newest Member of the Banking Committee and a Mem- 
ber from New York, I can tell you that I have great interest in this 
issue. And thank you again. 

Is it correct for me to assume, based on what I have heard here 
this morning in your statements and your responses, that the ef- 
forts by organized crime in various foreign nations, Russia and 
other nations, that the laundering of money in the United States 
is pervasive? 

Mr. Robinson. I think that is fair to say. We may not be the 
most pervasive, but certainly it is a serious problem that requires 
law enforcement attention and regulatory attention, I think. 



139 

Mr. Forbes. May I also assume that given your testimony, that 
the limited number of offenses that would qualify under the money 
laundering statute somewhat tie the hands of the Department of 
Justice to get at this problem? 

Mr. Robinson. I think there is no question, but that we could 
use some expansion of the statute specifically with regard to the 
specified unlawful activity predicates within the money laundering 
statute, yes. 

Mr. Forbes. The revelation, the recent revelations on one finan- 
cial institution, its unfortunate involvement with money launder- 
ing, only really suggested — you can correct me if I am wrong, but 
I got the sense and I don't think you have had a chance to complete 
your statement — but, when my colleague Ms. Waters mentioned 
ways of getting financial institutions to perhaps be more aggressive 
in their oversight of money laundering, were you about to mention 
that there were 105 financial institutions that in one manner or 
another had been involved, albeit not of their own knowledge, but 
it came to light that they were involved or their personnel were in- 
volved unwittingly in money laundering? 

Mr. Robinson. Yes, we have submitted some information with 
regard to that. Some may be mentioned in the attachments to my 
testimony, yes. 

Mr. Forbes. So it is about 105 institutions though? 

Mr. Robinson. We are talking about investigations and prosecu- 
tions over the last ten years, I think is what the matter related to. 
There were earlier hearings on this subject and one of my deputies, 
Mary Lee Warren, who supervises, among others, the Asset Forfeit- 
ure and Money Laundering Section within the Criminal Division 
and also the Narcotics Section, testified here, and then following 
that there was a submission of some additional information. We 
would be happy to make it available to you as well. 

Mr. Forbes. Thank you. Is it your sense that the financial insti- 
tutions take a more passive role toward the money laundering 
problem, or are they taking a more aggressive role? 

Mr. Robinson. I think hearings like this are causing everybody 
to devote a greater degree of attention to these matters. And I 
think that that will ultimately inure to the benefit of law enforce- 
ment as we can identify situations that warrant a careful scrutiny. 

Mr. Forbes. I guess more to the point, and perhaps some of this 
will come to light tomorrow when there is an announcement by the 
Attorney General and by the Treasury Secretary, but generally, as 
I understand it, beyond the statutory requirements that banks 
have in looking for suspicious transactions, has there been an effort 
in the last month or so, or a couple of months, particularly with 
the latest revelations, to get more aggressive and get the banks to 
be more aggressive in their approach to this problem? 

Mr. Robinson. I would like to think that everyday we get a little 
more aggressive, but I wouldn't limit it to the last month or so, but 
the efforts in this area have been increasing over a period of time 
and I expect will continue to increase as we have a greater appre- 
ciation for this problem. 

Mr. Forbes. And finally, if I may, has the Department ap- 
proached the Hill in trying to get these money laundering statutes 



140 

adjusted so that your hands are no longer tied in the manner I 
think that you suggested? 

Mr. Robinson. There have been proposals and this committee, I 
might say, has been very helpful to law enforcement in assisting 
us to make improvements in the statutory tools that are available 
to law enforcement. 

Mr. Forbes. The Department itself has made those recommenda- 
tions? 

Mr. Robinson. We have. 

Mr. Forbes. Thank you. 

Thank you, Mr. Chairman. 

Chairman Leach. Thank you, Michael, and let me extend a for- 
mal welcome to you on the committee, and we are grateful for your 
contribution. 

Mr. Forbes. Thank you. Thank you very much. 

Chairman Leach. Mr. Goode. 

Mr. GrOODE. Thank you, Mr. Chairman. 

In your statement, you said organized crime in Russia covered a 
wide array of activities. Just ballpark percentagewise, how much is 
protection rackets protecting people would you say? 

Mr. Robinson. I would be reluctant to put a percentage. It has 
been identified as a very serious issue, I think, in Russia. There 
has been a lot written about this. There has been a fair amount 
of the classified information, which you can't talk about, but there 
has been a fair amount of discussion about this problem in Russia, 
and I think it is a serious problem. 

Mr. GoODE. Would it be fair to say that it is far greater now than 
it was when the Communists ruled Russia in the 1960's? 

Mr. Robinson. That is my impression. I don't offer myself up as 
an expert on those particular matters, but it is obviously something 
we are spending a lot of time on. But that is certainly my impres- 
sion. 

Mr. GoODE. To jump to a tangent area, the tax. What kind of 
taxes does a business person pay in Russia now? 

Mr. Robinson. I would have to double-check. 

Mr. Goode. Do you have any income factor? 

Mr. Robinson. I do know there is a very substantial amount of 
evasion of taxes. My understanding is that the rate of taxation is 
reasonably high, and there are substantial incentives as a result 
for people to either engage in transactions that avoid the scrutiny 
of the taxing authorities in Russia or simply to try to avoid taxes 
altogether. I know it is a serious problem that has been recognized 
in Russia itself that needs to be addressed. 

Mr. GrOODE. Do they usually now focus more on sales tax type 
taxes or income type taxes? 

Mr. Robinson. I would be reluctant to offer an assessment with- 
out getting back, because I don't think I have gone into the detail 
of what their tax system is at this juncture. But we would be glad 
to try to do that for you. 

Mr. GoODE. Well, do the criminal elements help those businesses 
that pay protection to avoid taxes? Is it a twofold thing? In other 
words, I am going to protect you from some bad guys, but I am also 
going to help you in avoiding paying your share to the government? 



141 

Mr. Robinson. I would not at all be surprised by that, but as I 
say, our concentration here, and there are others who would prob- 
ably be in a better position to offer the right answers to your ques- 
tions, is domestic law enforcement violations here. Many of those 
things that are happening there, we are seeing the consequences 
on our shores and in the Justice Department, our primary atten- 
tion is the violation of U.S. laws. 

Mr. GOODE. Well, with regard to the United States and the influ- 
ence here, are the organized criminal elements trying to work with 
established criminal elements in this country or are they trying to 
set up something apart from? 

Mr. Robinson. We see a little of both, actually. We have seen 
some cooperation between some of these groups and traditional or- 
ganized crime groups in this country and some independent activi- 
ties as well. 

Mr. GoODE. All right. And I yield back, Mr. Chairman. 

Chairman Leach. Thank you, Mr. Goode. 

Mr. Barr. 

Mr. Barr. Thank you, Mr. Chairman. 

Mr. Robinson, I was reviewing your testimony here, including 
your references to the current money laundering statutes and what 
you see as their limited applicability to international cases such as 
the ones that we are talking about here today involving Russian or- 
ganized crime and money laundering. Are there any offenses, any 
provisions of the U.S. criminal Code that would, other than the 
money laundering statutes, that might be able to be used by our 
prosecutors for offences involving money that is diverted or fraudu- 
lently used; that is, that goes through the IMF, other than simply 
the money laundering statutes? 

Mr. Robinson. Well, there is certainly the fraud statutes — bank 
fraud statues, and variety that could be looked at in the context of 
specific facts. So money laundering is one of the tools, but there 
may be other fraud statutes that could be utilized, conspiracy and 
fraud statutes that could be utilized depending on the facts devel- 
oped. 

Mr. Barr. Because I know if we look at problems with misuse 
of Federal fiinds domestically, I know there are ways to directly at- 
tack funds that are misused or not used in accordance with statu- 
tory provisions on grants and so forth that go through domestic 
agencies and are used domestically, certainly. 

Mr. Robinson. And also, as I am sure you know from your prior 
work in the criminal justice area, that the interstate transportation 
stolen property statute and others might also provide a vehicle for 
being used in appropriate circumstances. 

Mr. Barr. Are attorneys at the Department, or in particularly 
U.S. Attorneys' offices that might have jurisdiction over these par- 
ticular type of offenses, are they looking at those statutes and the 
possibility of bringing cases? In other words, being imaginative, 
using current Federal statues while we are waiting, and hopefully 
we can adjust some of these statutes to put more teeth in them as 
you have recommended, as others have recommended — rather than 
just wait for that to happen, are your prosecutors right now, as we 
speak, looking at different ways that they might be able to get at 
this if there are, as we certainly suspect, millions and millions of 



142 

taxpayer dollars that have been diverted from legitimate uses pro- 
vided by Congress and intended by the President, or are we just 
sitting back and sort of waiting for new statutes? 

Mr. Robinson. I think you are exactly right, imaginative exam- 
ination of all of those statutes is going on. We would expect that 
to go on. I am sure you would expect that from your experience, 
and we expect it here as well. 

Mr. Barr. We certainly hope so. One area that is of concern to 
a number of us is you have indicated these cases are very, very 
complex. Even among money laundering cases, these are more com- 
plex, because of the international institutions involved and the 
international nature of them generally. Does the Department have 
training programs in place now for equipping prosecutors and 
agents with the tools they need to level the playing field with re- 
gard to these criminal enterprises or do you need to develop some 
additional or new training programs in light of the complexities of 
these cases? 

Mr. Robinson. I think we need to continue to do that. We have 
those programs in place. We have international coordinators now 
in the U.S. Attorneys' offices. As I said earlier before you were 
here, there has been a sea change since I was the United States 
Attorney in Detroit twenty years ago to the kinds of issues that are 
being confronted in these days by our prosecutors throughout the 
Federal system, and I think we need to do continuous work in get- 
ting our Assistant United States Attorneys and Federal prosecu- 
tors, as well as the investigators, fully trained with regard to the 
new technology that is being used and new activities that are oc- 
curring really internationally these days. 

Mr. Bark. Thank you. I would urge you to move forward on that 
as quickly as possible and also to really push these prosecutions, 
because there is an awful lot of money at stake here for the Amer- 
ican people. 

Mr. Robinson. Thank you. 

Chairman Leach. Thank you, Mr. Barr. 

Well, let me just conclude with two questions. One I am not sure 
you will be able to answer and the second may be rhetorical. First, 
is the Justice Department looking into the possible diversion of 
IMF funds in any of the cases it has under review? 

Mr. Robinson. The entire matter of the investigation, there 
aren't any limitations on it. The investigation is going to be done 
thoroughly and carefully and carried to wherever it may go without 
any limitations at all. 

Chairman Leach. Second, and this may be rhetorical, have you 
been in close consultation with Justice authorities and legal au- 
thorities and banking authorities in the Cayman Islands and re- 
ceived good cooperation from them in your investigation? 

Mr. Robinson. I think the answer is yes, that there has been. 
This is going to be increasingly important for us to engage in, par- 
ticularly in places where we have concerns about offshore financial 
institutions that are putting money beyond our reach. That is a 
challenge for us, and we need to continue to follow up on it. 

Chairman Leach. I raise this for the following reason, just so 
that you understand. A few months back, the Federal Reserve of 
the United States intervened and helped assist an American incor- 



143 

porated institution called Long-Term Capital Management, involv- 
ing funds, however, that were chartered in the Cayman Islands. 
And I asked the Chairman of the Federal Reserve Board if he had 
of course consulted with the Cayman monetary authorities before 
making this decision to save Cayman funds, and this was a rhetori- 
cal question, which of course he had not. 

But the point I would raise is that we have developed a system 
in the world where some countries establish laws that are designed 
to defend the lawless. And so one of the great questions we have 
as a country is how do we disincentivize people using those coun- 
tries, and I would like to make it very clear if the Justice Depart- 
ment does not get full cooperation from countries like the Cay- 
mans, clearly the Congress is going to have to move in directions 
to disincentivize that kind of country from being utilized. And I be- 
lieve that that is something we ought to be looking at seriously, 
and I would be looking at constructive advice from the Justice De- 
partment in that vein. 

Well, let me just conclude by noting that sitting behind you is 
Mr. Mark Richard, who is a longtime Justice Department employee 
who is moving on to a new assignment. We want to wish him well 
in his new assignment as we wish you well in your current assign- 
ment. Thank you very much. 

Mr. Robinson. Let mc just say as a footnote to that, Mark is 
going to be in Brussels, still with the Criminal Division, and I 
think it is symptomatic of the fact of the required reach of our 
international law enforcement efforts that Mark will be working 
with the European Union and working with our offices abroad in 
trying to deal with the very complexities of the kinds of things we 
have been talking about at this hearing. 

Chairman Leach. Well, thank you very much, Mr. Robinson. 

Mr. Robinson. Thank you. 

Chairman Leach. I would like to ask now our second panel, 
which is also a one-person panel, to come forward. Our second wit- 
ness today is Mr. Yuri Shchekochikhin, who is a member of the 
Russian Duma and an editor of the Moscow paper called Novaya 
Gazeta. We welcome Mr. Shchekochikhin who is violating two nor- 
mal precedents of the Congress; that is, we normally do not invite 
foreign witnesses and particularly foreign government witnesses. 
We are particularly appreciative that you have agreed to come, and 
normally we do not invite members of the press as witnesses. You 
happen to be a member of the first and fourth estates in terms of 
an American term of art. 

Mr. Shchekochikhin's newspaper has been a leading reporter of 
certain issues of corruption in Russia, and for that reason we want- 
ed to invite his perspective before the panel. Mr. Shchekochikhin 
is joined by an interpreter, and we invite him to proceed as he sees 
fit. Welcome. 

STATEMENT OF YURI SHCHEKOCHIKHIN, MEMBER OF THE 
RUSSIAN DUMA, EDITOR OF MOSCOW NEWSPAPER, "NOVAYA 
GAZETA" 

Mr. Shchekochikhin. Thank you, Mr. Chairman, and Mr. Chair- 
man, Members of Congress, my English is not good enough for so 
serious a report, and I ask Natasha to help me to translate. 



144 

Chairman Leach. Of course. 

Mr. Shchekochikhin. Mr. Chairman, I would like to thank you 
for this invitation to participate in the hearings, which I am sure 
will play a major role in our joint struggle against corruption and 
in Russian-American relations. Although, both yesterday and 
today, I felt as if I were at a meeting of the Russian Ministry of 
the Interior. I heard the same names and the same numbers, al- 
most as if I were at home. 

I am a member of the Committee on Security and a member of 
the Committee on Struggle with Corruption, and I represent the 
Yabloko faction in the Duma. At the same time, I am Deputy Edi- 
tor of the newspaper Novaya Gazeta, New Gazette. It is a weekly 
which has a circulation of about half-a-million. Unfortunately, the 
investigations we do are sometimes more effective than the inves- 
tigations done by the government. At least three Vice Premiers had 
to resign after publications in our newspaper. However, the new 
ones who came were no better than the old ones, but that is our 
life today. 

Yes, it is our life where corruption has become the main stum- 
bling block to development in our society. The public is firmly 
aware of the concept, "the family" now, and by that we mean not 
only the president and his immediate family, but the people sur- 
rounding him. 

As the leader of our faction, Grigory Yavlinsky said "You can see 
the same thing only in Indonesia." A day doesn't go by that our 
press does not mention the name of the dark genius, Boris 
Berezovsky. The President of Sibneyts, Rajnnond Mabrovich, who 
is called head treasurer of the family. By the way, it was our news- 
paper that has found criminal action, and based on this case, he 
should be in prison right now and not in the Kremlin. 

Another hero of our times, the President of the bank Unicom, 
Ashor Ygadzon, who managed to steal about a million dollars from 
an organization Rosvooruzheniye, Ross Armaments, but this was 
the man who organized the provocation against Skuratov, the At- 
torney General, and another ten or dozen names which defined the 
life in our country. 

I am sorry that I could not prepare a written statement for these 
hearings, but there were reasons for this. Right before my trip to 
Washington, 24 hours before the trip, I returned from Dagestan, 
where there are new Caucasus wars taking place. Local residents 
openly called this war a money war, and even the eagles of the 
mountains know the name Bidirovsky. There I had occasion again 
to be convinced that corruption is not only an evil, but it also leads 
to the loss of life of innocent people and bloodshed, but these are 
all our problems. 

I am thinking about something else, why today money launder- 
ing in Russia has become such an important issue here in the 
United States. The constant publications and the press here and 
releases remind me of a bombing attack. All of this happened a 
long time ago. America knew about this. Why only today? I want 
to warn you about coming to conclusions about the money launder- 
ing situation in the Bank of New York. Maybe these are inter- 
national organizations, maybe ours. Don't forget that Russia is still 
a wealthy country. Two hundred years ago, our historian 



145 

Karamzine, when he saw fellow Russians in Paris, and this Rus- 
sian asked him, "Well, what is happening in Russia?" He re- 
sponded, "They are stealing." During those 200 years, they haven't 
managed to steal everything, and because of that, the $1.5 billion 
that is leaving Russia, more often than not, it is our money. 

There are American traces for this money. Five years ago we had 
the history of Mr. Stroiyev. An American mass media called him 
one of the best businessmen in Russia. Newsweek had a photograph 
of him on its first page. He was a member of the Moscow govern- 
ment, and at the same time President of the firm Perestroika. He 
stole everything that he could. And bought everything that he 
needed or wanted in America. He ran away from Russia two days 
before my article about him appeared, and now he is leading a 
calm life in Atlanta, and he is afraid to return to Russia. 

I also researched the history of oil. The money received for the 
sale of this was supposed to go to the Republic of Komi. The Repub- 
lic received only about $1 million. The other $11 million turned up 
in pockets of various officials. When in Copenhagen, I found a list 
of these officials and of the money that was lost, and at that time 
huge sums were transferred to the U.S. 

The Committee for Fighting Corruption and my fellow members 
in the Duma raised the question of raising a criminal issue about 
this, and this case was given to the procurer of the small town 
Solikamsk, and the official there in charge of the investigation has 
no money to travel anywhere to investigate this issue. And the in- 
formation I had, the bills, are still lying in my safe at home, be- 
cause it seems that nobody was interested in this. 

The truth of the matter is that the local governor has ties to the 
president's family. As I was told in Copenhagen, one of the oil com- 
panies, Tabakiev, was sold at auction offshore in the Virgin Is- 
lands. The son-in-law of President Yeltsin, Aleksandr Uchinko, was 
involved in these dark dealings. 

There is another American connection, the city of Monroeville in 
Pennsylvania, that one of the founders of the firm Alletta, who was 
buying Russian nuclear technology, he is a member of the ministry 
named ADAMAT, and the account for this company, and possibly 
the Minister itself, is in a PNC Bank in Pennsylvania. Much has 
been written and said about this, but even though the premiers in 
Russia have been changing, the ministers still stay. 

Now, about credits. We took an interest in the expenses or in for- 
eign credits, and among those receiving them were now defunct 
banks, Menatep, Imperial, Inkombank, Dacca bank, and what was 
even more surprising to us, $400 million are to be spent in aid to 
Mongolia, Tunisia, Cuba and Vietnam, and so forth, Algeria. We 
are not rich enough these days to be able to do this. And the most 
interesting thing, or maybe interesting for my American colleagues, 
each third item in the credits is titled "consulting." Could it be that 
during those last two years, all of this consulting done for our offi- 
cials has not taught them anything? But who are these consult- 
ants? 

A few years ago, with my American colleagues, we studied the 
question of where the credits for supporting small business dis- 
appeared to. It turned out that they were in several books which 
remained in the Russian Embassy, but more than that, I was told 



146 

that money which is given by the West is not only stolen by our 
officials, but is also going into the pockets of these numerous con- 
sultants, including those from the USA for expensive Moscow ho- 
tels, for travel with family and friends to Moscow, and so forth, and 
I want to stress and repeat that I know this from my American 
friends. 

I am very grateful that yesterday I heard in this hall that the 
state Duma still exists, but America is a strange country. It only 
knows symbols. Gorbachev is a sjmnbol of Perestroika. Yeltsin is a 
symbol of democracy. Chubais is a symbol of privatization. 

The conclusions of the commission of which were about the rea- 
sons for the default of August, which were created by a decision of 
the federal council, it gave the names openly of Kadiyevka, 
Dubenya, Chubais as the authors or the executors of this financial 
crash. More than that, in this conclusion, Chubais is accused of giv- 
ing out certain interested to financial groups, both ours and for- 
eign, the timetable for the financial crash that was to come. There 
is a different opinion of Chubais in different parts of society, and 
including my colleagues, the members of the democratic faction 
Yabloko. 

But even during the non-official visits of Chubais to Washington, 
he is received by the highest officials of the U.S. Administration. 
There is a double bookkeeping, both here and there. I think that 
the decision of the U.S., that was not well thought out, and an in- 
adequate evaluation of the current situation in Russia leads to the 
fact that the higher officials in Russia feel that they can do what- 
ever they wish, their hands are not tied. This happened in the fall 
of 1993 when the American Administration in practical terms ap- 
proved of the dissolution of parliament, no matter how I personally 
felt about the parliament at that time. 

I remember a conversation I had with a high-level government 
official in Washington. He said what Russia has to do in par- 
liament is turn off all the water supplies so they would be forced 
to leave, and I asked him, would he advise that to his own Presi- 
dent, to cut off the water supply in the Senate or Congress? And 
this leads to what we are talking about here and even more than 
here, in Moscow. 

From time to time I hear from our officials, well, what is this, 
somebody received $10,000 or $100,000 for a book that has not 
been published yet. Is that money? And I am reminded of our 
teachers, our doctors, our soldiers who are fighting in the 
Caucasus, and our officers whose salary is 22 rubles a day, which 
is enough to buy a pack of cigarettes. 

Thank you very much. 

Chairman Leach. Well, thank you very much, Mr. 
Shchekochikhin, and let me stress in terms of symbols, I think the 
Shchekochikhin symbol will be straight talk. Your issue of book 
publishing is not novel to Russia. 

Let me ask a question just about reactions in your country. You 
have a few Russians today who have bought major real estate in 
the United States, in Pebble Beach and Palm Beach. What do Rus- 
sians think of this? Are they offended or do they think this is right 
and proper? 



147 

Mr. Shchekochikhin. You know, we can't say today that every- 
one who buys real estate is a bandit or a criminal, but I think we 
have to go not from private property to crime, but from facts which 
take place in Russia and then go to the real estate. And unfortu- 
nately, the cooperation between our special services is very bad, no 
matter what is said here or contrary to what is said here. 

Chairman Leach. What are the best estimates of the capital 
flight from Russia? And can you give us your assessment of why 
so much investment from Russians has fled Russia? Is it the eco- 
nomic stability, the political instability, the absence of legal protec- 
tions in property? Why have Russians lost confidence in their own 
country and determined to allow so much capital to go abroad? 

Mr. Shchekochikhin. That is a very important question. When 
President DeGaulle, when he came to power in France said, I ask 
the French to put their money in French banks and I promise that 
not one centime will be lost — unfortunately we have no one to say 
something like that. And of course, lack of trust in the government 
is the first or the foremost reason. In spite of the efforts of the 
Yabloko faction to change the tax laws, nothing is happening. If 
one were to pay all taxes, then there wouldn't be any business at 
all. It is safer to hold the money in the West. Unfortunately, for- 
eign banks are not working in Russia. There are many reasons. It 
is like the thousand and one nights. 

Chairman Leach. One final question. What role do you see being 
played by what are called offshore banks, banks in Antigua and 
Cyprus, and is there any reason why the Duma could not pass a 
law that disallowed capital flight to countries that didn't have well- 
regulated banking systems? 

Mr. Shchekochikhin. Yes. The Duma could pass a law about 
that, but what will happen after that? With the dissolution of the 
Soviet Union and with the formation of new countries with which 
we do not have normal boundaries, with this enormous amount of 
joint enterprises or firms, the money will flow out. I am not even 
talking about the direct carrying out of cash money. 

About five years ago I saw someone in Washington who carried 
out $3 million in cash. I asked him, "How did you manage to do 
that?" And his eyes became very sad, and he said, "I had $5 mil- 
lion." 

Chairman Leach. Thank you, sir, 

Mrs. Maloney. 

Mrs. Maloney. Welcome, Mr. Shchekochikhin, and thank you for 
joining us here today. In this country, money laundering is en- 
forced by our bank regulators, the Treasury, through FinCEN, the 
Justice Department, the FBI and many other agencies. Could you 
comment on the level of commitment to combat money laundering 
in your own country, what are the agencies combatting money 
laundering, and do they have a strong political and popular sup- 
port? 

Mr. Shchekochikhin. There is a presidential veto on the law 
that is about money laundering. This law is not perfect, but it is 
this kind of law that is not perfect in many other countries, too, 
but you need some sort of basis or foundation. Then, second, there 
was a commission formed to deal with money laundering, with rep- 



148 

resentatives from several agencies, but this is a very complicated 
question and not only in Russia. 

In this very room yesterday, I heard from a colleague of yours 
that I know that American banks launder money, but not a single 
bank lost its licensing during this time. And of course we need co- 
operation between our financial organs, exchange of information 
with each other, trust in each other. That is the most important 
thing. 

Mrs. Maloney. Could you elaborate? You said there was a law 
that passed that was vetoed by the president. You said there was 
legislation with a presidential veto. Could you clarify? 

Mr. Shchekochikhin. You know, it would be easier for the presi- 
dent to explain this. 

Mrs. Maloney. But he did veto the legislation. 

Mr. Shchekochikhin. Yes, he vetoed a law which was passed by 
the Duma. Right now, a committee is working on this. 

Mrs. Maloney. What was the reason he gave when he vetoed the 
Duma's legislation on money laundering? 

Mr. Shchekochikhin. Well, first, because the law was not per- 
fect and there is one thing in the law that you can take issue with, 
and our colleagues from the Communist Party and we argued with 
them about this. 

Mrs. Maloney. What was the point they took issue with? 

Mr. Shchekochikhin. OK. The terminology used was "unlawful 
income" rather than "criminal income," because unlawful is a much 
more embracing or wider embracing term. You could take some 
grandmother who is selling flowers at a metro stop, but this gave 
the president a reason to veto this law. 

Mrs. Maloney. Well, Mr. Chairman, I want to compliment you 
on calling this hearing and for the legislation that you introduced 
yesterday, and I have reviewed it and I look forward to working 
with you to enact it in this Congress, even though it is not perfect. 
It is a step in the right direction, and I support it. 

Chairman Leach. Thank you very much. And I want to make it 
very clear that this hearing is not designed to investigate Russian 
Bablashisks. 

Mrs. Roukema. 

Mrs. Roukema. All right. Thank you, Mr. Chairman. 

I do want to ask a question for clarification. I believe you said 
that foreign banks are not active in Russia. Did you indicate that? 
But does that mean that only U.S. banks are active in Russia. Or 
did I misunderstand you? 

Mr. Shchekochikhin. No, no, you misunderstood. There are 
no 

Mrs. Roukema. No foreign banks? 

Mr. Shchekochikhin. There are no foreign banks in Russia. You 
said that America welcomes a number of foreign banks in Russia. 
That was said here yesterday in these chambers. 

Mrs. Roukema. Oh, I see. 

Mr. Shchekochikhin. But I think that active Russian banks — 
and the Western banks in Russia probably, that is equal to zero 
right now. 

Mrs. Roukema. But there are still some American banks active 
in Russia or have been up until now? 



149 

Mr. Shchekochikhin. No, I think that American banks are act- 
ing or active with Russian money in the U.S. 

Mrs. ROUKEMA. We will come back to that, but let me ask this 
question. At the beginning of your testimony today you made this 
statement: "I want to warn you about coming to conclusions about 
the Bank of New York," but you didn't state your warnings about 
the conclusions. Can you comment on that subject? 

Mr. Shchekochikhin. I read the American press about this 
scandal. The same facts are repeated, and I don't see any proof, but 
I read that this scandal involves money from the IMF and that 
somehow this is linked to whether aid should be given to Russia, 
and I am afraid when criminal questions are taken over by political 
questions, and that is why I would not rush to conclusions. Maybe 
those, the commentators are correct, but maybe not. 

Mrs. RoUKEMA. I hope you would feel confident at this point in 
time. I am confident that the investigation through the criminal 
justice system is being properly handled. It will have due process 
under the laws of our country. Let me go on and ask you this. One 
of our people yesterday on the panel made this statement: "Russia 
is too important to abandon." 

A question I have for you is how and when can we restore our 
economic and foreign policy ties to Russia in your opinion? 

Mr. Shchekochikhin. Well, right now there is the hope for 
America and Russia, it is gone. What I am saying is what people 
feel over there. 

Mrs. RoUKEMA. Yes, yes. 

Mr. Shchekochikhin. Maybe it will come back. I hope that this 
will happen. Who will make the first step? I came to Washington 
right after the bombings in Belgrade and I tried to explain to the 
high officials and the Administration in the U.S. The experience 
from Vietnam, from Afghanistan, from Iraq, it all turns out to be 
something other than what it was supposed to be. It is a very com- 
plex question, and this really had an impact on the relations be- 
tween Russia and the U.S., and I was told that I don't understand 
anything in foreign policy. 

Mrs. RoUKEMA. I thank you for your response. 

Chairman Leach. Thank you. 

Mr. Bereuter. 

Mr. Bereuter. Thank you, Mr. Chairman. 

Mr. Shchekochikhin, thank you very much for your testimony. I 
heard your story about someone in this Administration suggesting 
the water should be shut off on the Duma. They have the same at- 
titude in some places about the Congress shutting off" the lights 
and the water. They love democracy in the abstract, but when it 
comes to the inconvenient appendage called the Congress, which is 
tenacious and inquisitive, it creates a lot of problems for those peo- 
ple who prefer an elected absolute monarch. 

Having commiserated with you as a parliamentarian on that, I 
would like to ask you what you meant when you said there is dou- 
ble bookkeeping in both places. 

Mr. Shchekochikhin. Well, it is a double moral standard. It is 
not a financial category right now. 

Mr. Bereuter. We have had people come before us and in other 
sessions, Russian economists from outside of the government and 



150 

institutes, who have suggested that the West should provide no 
more financial assistance to the central government, but should, in 
fact, provide multilateral and bilateral assistance to building de- 
mocracy by working with people at the local level and by pushing 
for a rule of law. They have also gone on to say that since the debt 
of the Russian government seems so hopelessly large, a better solu- 
tion would be to forgive the Soviet debt which falls on Russia 
today. That would five the Russians some hope for actually meeting 
debt requirements which, in turn, could cause a positive effect upon 
performance. 

Now, it is easy for an American to embrace that possibility, if it 
is a good one, because most of the Soviet debt is held by German 
banks. What is your reaction to: One, shutting off aid to the central 
government?; and, second, sending it out to governors and local 
groups that are doing their job — focusing on democracy and rule of 
law? 

Mr. Shchekochikhin. You know, I am not an economist. I am 
in the Security and Corruption Committees, and I am not as intel- 
ligent as the economists, but I am afraid of the words "give money 
for democracy." Because then what happens is that democracy is 
being built on only one small part of the territory for one person. 
I think we have to try to get joint projects, joint technologies where 
a year from now you could actually feel or see the results, what is 
happening. 

I am sure that Russia does not need any more consultants from 
the U.S. or from Germany on how to build democracy. The world 
is small. We have to work together. 

Mr. Bereuter. Mr. Shchekochikhin, I want to fit in one more 
question if I may on my time. What is your best judgment about 
the extent to which Russian organized crime has succeeded in gain- 
ing control or ownership of Russian banks? 

Mr. Shchekochikhin. You know, I heard a colleague talk here 
today of the hearings, and for many years I have been trying to 
find the Russian mafia in America. A lot has been written about 
it and a lot is being said about it, and there is only one criminal 
case against Yaponchik, and I am getting tired of all of these mys- 
terious figures, the Russian mafia, because I see the same thing in 
Russia also. Organized crime is actually being suppressed by the 
officials in the administration. It is the officials who are getting the 
money. 

These are new processes. I have been studying this issue of all 
of these criminals for twenty years, you can believe me, and that 
is what is frightening, and today the organized crime is turning to 
narcotics and things like that. 

Mr. Bereuter. Thank you, Mr. Chairman. 

Chairman Leach. Thank you. Just to clarify what you are say- 
ing, is there is an increase in public corruption as contrasted with 
traditional criminal activities? 

Mr. Shchekochikhin. Yes, that is correct. 

Chairman Leach. Thank you. 

Mr. Barr. 

Mr. Barr. During the course of the last two years in our country, 
we have investigated extensive use of illegal foreign money into the 
President's reelection campaign, including large amounts of money 



151 

coming in from Communist China and other countries in the Far 
East. Are you aware of any evidence that any money from Russia, 
including from organized crime elements, has been funneled into 
any political or election campaigns of public officials here in this 
country? 

Mr. Shchekochikhin. No, ours — they won't give money for that. 

Mr. Barr. They are somewhat unique then. Do you have any evi- 
dence, I know you touched on this very briefly, but could you indi- 
cate if you have any further evidence that the money that is being 
accumulated by organized crime in Russia is being used to traffic 
in armaments with groups outside of Russia, groups inside Russia, 
or other countries? 

Mr. Shchekochikhin. Yes. A lot has been said and written about 
this. Criminal cases were begun — again several generals who had 
ties with these bandits, with bandits. But, you know, the arma- 
ments market is traditional for organized crime and for high-level 
officials who are linked to that. 

You especially see this in the Caucasus. Right now you had this 
case with this invasion of Dugestan and there was an international 
brigade in Dugestan at that time. I myself saw people who were 
killed who were from the Sudan, and they had the newest kind of 
armaments, which the Russian army doesn't have. Almost every 
one of them has this English sniper rifle, Magna, whereas in the 
territory of Dugestan there are only two of those. And so, as you 
can see, it is a very big market. 

Mr. Barr. Any evidence that that market includes biological or 
chemical weapons? 

Mr. Shchekochikhin. There is some, a little bit written about 
this, and especially the younger investigators are looking into this. 
But those conflicts that I had looked into, I did not see any evi- 
dence of this or I would have written about it. 

Mr. Barr. Is there any evidence that the trafficking of arma- 
ments, or the funding of sales of armaments, extends to terrorist 
nations such as Iraq or Libya? 

Mr. Shchekochikhin. Well, you know, I am convinced that those 
attacks on Dugestan were funded by Arabic countries, and every- 
one knows about this, and a lot of money — big money, is going. You 
know, the main purpose there is to establish Islamic Fundamental- 
ism, or even worse, on Dugestan territory. And so a lot of money 
has been given for this, and I think that this whole Caucasian busi- 
ness is, it is not only a Russian affair, it should be international, 
or it is international. Because there are a lot of links there with 
countries that are traditionally supported by the USA. 

Mr. Barr. Thank you. 

Chairman Leach. Thank you very much, Mr. Barr. And let me 
thank you, Mr. Shchekochikhin. 

I would also like to extend personal thanks to the interpreter 
who represents the Library of Congress, and I think she has re- 
flected very well on herself and the Library and we appreciate very 
much your being able to do this today. Aiid I might ask that you 
introduce your name for the record if you would. 

The Interpreter. Natalia Montviloff. Thank you. 

Chairman Leach. Thank you. Thank you, Mr. Shchekochikhin. 
Thank you. 



152 

Our third panel is — we welcome Thomas A. Renyi. Mr. Renyi is 
Chairman of the Board and the Chief Executive Officer of the Bank 
of New York. 

And your full statement will be placed in the record. And you 
may proceed as you see fit and read the full statement or parts as 
you prefer. 

STATEMENT OF THOMAS A. RENYI, CHAIRMAN AND CEO, 

BANK OF NEW YORK 

Mr. Renyi. Thank you, Mr. Chairman. Mr. Chairman, Members 
of the committee, my name is Tom Renyi, and I am Chairman of 
the Board and Chief Executive Officer of the Bank of New York. 

I appreciate the opportunity to testify before the House Banking 
Committee on behalf of the Bank of New York. Our bank was 
founded in 1784 by Alexander Hamilton. Our business today fo- 
cuses on the global financial services sector, and we are one of the 
leading correspondent banks for commercial banks around the 
world. We provide corporate and retail services in our home mar- 
ket, as well as a variety of other trust and investment services. 

The Bank of New York has consistently enjoyed a reputation for 
prudence and responsibility while producing amongst the highest 
earnings in our industry for our shareholders. I have been dis- 
mayed by suggestions in the press that the Bank of New York was 
somehow actively involved in the reported Russian money launder- 
ing scandals. Let me said the record straight, no charges have been 
filed against the Bank of New York, no relevant authorities have 
asserted that the bank is engaged in money laundering or violated 
any other law. No customer of the bank, nor the bank itself has 
lost money as a result of the activities in question. 

During the past year, we have worked closely with all of the on- 
going investigations. We have provided thousands of documents 
and millions of electronic bits of information, and these investiga- 
tions are not yet complete. They remain highly confidential, and as 
you can understand, there are limits to what we can disclose prior 
to their completion. 

Mr. Chairman, in my written statement I have provided detailed 
information on the six specific topics raised in your letter inviting 
me to appear today. I would like to use this limited time available 
to me now to discuss several basic questions: What events actually 
took place, how did they take place, what have we done as a result 
of these events, and the subsequent inquiry. And, finally, Mr. 
Chairman, I would like to suggest policy issues that the committee 
may wish to consider. 

Press accounts have tended to ignore the Bank of New York's co- 
operation with the investigating agencies both here and abroad. 
And although, Mr. Chairman, there are limits as to what I can say 
again about these investigations, let me try and describe what I 
can. 

The bank learned of these investigations a year ago in September 
of 1998, and when we requested the U.S. Attorne/s permission to 
close the accounts, we were asked to keep the accounts open, to ad- 
vise no one, other than our bank regulators, and to take no action 
that would compromise the investigations. We did all of these 
things. 



153 

This was our commitment then, and it remains our commitment 
now to cooperate fully with all law enforcement agencies. Now 
when opened, the accounts were quite normal. The principal ac- 
counts were opened at a New York City branch of the bank by 
Peter Berlin, a New Jersey resident, who became a U.S. citizen in 
1996 and who represented himself as operating small businesses in 
the New York metropolitan area. 

The accounts were referred to us by an officer of the bank, Lucy 
Edwards, Mr. Berlin's wife. The initial history of these accounts 
were unremarkable and account activity was consistent with a 
modest business. 

However, the volume of funds moving through these accounts in- 
creased to levels well beyond what would have been expected for 
businesses of this kind. And when bank employees noticed the in- 
crease in volume, questions were raised within the bank both about 
Mr. Berlin and his companies. But the questions were not pursued 
with sufficient vigor or follow-through and the questioners relied 
too heavily on the fact that Mr. Berlin was married to a well-re- 
garded bank officer, Ms. Edwards, who again originally referred 
the accounts. 

Allowing these accounts to remain open and active without suffi- 
cient questioning was a lapse on the part of the bank, and I have 
taken personal responsibility for implementing remedial actions, 
which I will describe later in my testimony. But let me turn, Mr. 
Chairman, to the Bank of New York's business dealings in Russia. 
The bank has done business in Russia since 1922. And with the 
collapse of the Soviet Union in 1991, a new banking system began 
to emerge in Russia. And we, as many of the nation's leading com- 
mercial and investment banks, were asked to aid in the develop- 
ment of their banking system. 

The role we chose was similar to what we do in many other coun- 
tries and more limited than what many other banks chose. In our 
case, correspondent banking and securities processing activities, 
bank-to-bank business that generates stable predictable fees with 
relatively low risk in capital exposure was what we chose. To cor- 
rect any misimpressions, I want to underscore the fact that Bank 
of New York has no branches or bank subsidiaries in Russia, just 
a small five-person office that performs administrative functions. 

When we open correspondent relationships, we are selective. We 
do business only with banks that meet the high standards in their 
particular marketplace. We require documentation from them as to 
the legality and the creditworthiness of their businesses and we re- 
view their capital adequacy and their reputation in the local mar- 
ketplace. 

But having a correspondent relationship with a bank, Mr. Chair- 
man, does not give us nor any bank much direct knowledge about 
that correspondent's customer accounts. This results from the 
opaque nature of the electronic global payment system. Information 
regarding the sender and receiver of funds consists little more than 
sums, account numbers and digital information regarding the bank 
identified. 

The system is excellent at tracking funds' flows within its elec- 
tronic pathways, but the system is not very good at identifying who 
controls the origination or destination accounts, how they may have 



154 

come by the money or what they plan to do with it. So we share 
that frustration that all of the authorities who are our partners in 
these ongoing investigations have regarding these accounts. 

In the last five weeks, we have examined vast amounts of data, 
but we do not have all of the answers that we want and we don't 
know when or if we will. Working with outside auditors, we have 
reviewed the program we employ for identifying and reporting sus- 
picious activity, and we have identified several areas of our im- 
provements and have implemented already most of the changes. 

We have formed 

Chairman Leach. Mr. Renyi, if I can interrupt you for just a sec- 
ond. 

Mr. Renyi. I'm sorry, Mr. Chairman. 

Chairman Leach. I apologize, we are interrupted by a vote on 
the floor, maybe several votes, and it strikes me that it might be 
better to recess in the middle of your testimony than just before 
you finish so that you have a better chance to give a flow. 

Mr. Renyi. Fine, Mr. Chairman. 

Chairman Leach. So what I would suggest is that the hearing 
recess pending the several votes, and then we will return to your 
testimony. And you can proceed as you see fit at that time. 

Mr. Renyi. Very well. 

Chairman Leach. So the hearing will be in recess pending the 
vote. 

Mr. Renyi. Thank you. 

[Recess.] 

Chairman Leach. The hearing will reconvene. 

When we recessed for a series of votes, Mr. Renyi was in the 
middle of his testimony, and I would like him to proceed. 

Mr. Renyi. Thank you, Mr. Chairman. 

Prior to the vote, I had summarized much of the activities that 
were taking place in the Bank of New York that is subject to our 
investigation and, most importantly, what we did about them, what 
we are doing about those activities, those investigations. 

I was at the point where I would like to really discuss and offer 
some public policy commentary and being that one of the central 
issues, one of the central questions that are coming before this sub- 
committee is the possible misuse of international funds transfer 
system, which we feel is a truly important issue that affects clearly 
all of the banking system here in the U.S. 

It is an issue that has two components, the granting of access to 
the global payment system and the monitoring of activity taking 
place within the system. Mr. Chairman, if Congress concludes that 
the access to the payment system should be tightened, I would urge 
strongly that this be done through a process of international co- 
operation, otherwise, if we restrict access in any one country, we 
may simply drive would-be wrongdoers to less stringent points of 
entry into the system. 

The U.S. dollars, the unquestioned currency of choice of pay- 
ments, for pajonents moving through the global system, any policy 
action that reduces the importance and attractiveness of the U.S. 
dollar for world trade would place the United States at a competi- 
tive disadvantage. 



155 

As we look at monitoring activity within the payment system, we 
should as well determine how U.S. foreign policy should address il- 
licit business activity that uses this payment system. 

Today, an agency of the U.S. Treasury, the Office of Foreign Ac- 
cess Control provides enforcement against academically embargoed 
countries. Should that approach be applied to money laundering? 
Should it be applied to capital flight? Could it be done without hin- 
dering legitimate trade flows? And if we choose to step up surveil- 
lance activities, can we do so with appropriate respect for our fel- 
low citizens' right to privacy? 

Mr. Chairman, you have expressed a policy concern about the 
role of U.S. banks in establishing correspondent relationships in 
Russia and other emerging countries where there are clear con- 
cerns for corruption. Let us be careful that if Western banks red- 
line Russian banks, the emergence of a modern capitalistic econ- 
omy in Russia will probably be impossible. 

In conclusion, I believe that these are legitimate and important 
issues that touch on the central themes of these hearings. Yet the 
broader considerations should not obscure the essential responsibil- 
ity that we and all the participants in the global system have in 
ensuring its appropriate use. When any financial institution pro- 
vides access to the system or facilitates its use, it must do every- 
thing it can to prevent illicit activity from taking place as a result. 
And if illicit activity does take place, it must detect it and bring 
it promptly to the attention of appropriate authorities. This is our 
responsibility and on behalf of the Bank of New York, I reaffirm 
that responsibility today. 

Thank you, Mr. Chairman. 

[The prepared statement of Thomas A. Ren}^ can be found on 
page 381 in the appendix.] 

Chairman Leach. Thank you very much, Mr. Renyi. 

Let me say that there is an element of awkwardness in all of this 
hearing in that we have before us today one of the most reputable 
banks in the world and a bank with an enormous history, in fact, 
as stated in your initial comments, the oldest bank in the United 
States founded by the man many of us considered to be our great- 
est Secretary of the Treasury, Alexander Hamilton. 

The fact that it is such a great bank and such a reputable bank 
makes the questions at stake rather large, because if our best and 
strongest are part of a system in which money can be laundered, 
whether it be through fault or not fault of the bank, is very dif- 
ficult. 

So let me just begin by saying, can you give us a sense of the 
magnitude of funds that you believe have come from Russia 
through your bank? 

Mr. Renyi. I am sorry, I didn't hear you. What is the source? 

Chairman Leach. The magnitude of funds that would be consid- 
ered in a traditional way. You know, press accounts are in the $10 
billion figure; you indicated to me privately perhaps less than that. 

Mr. Renyi. Somewhat less than that. We are in the process of 
our own investigation, which really started five weeks ago when 
the leak first occurred in the press, and as you can imagine, this 
is a very, very complex, very complex situation to review, and there 



156 

are literally thousands of pages of documents, thousands of credits 
and debits flowing in these accounts. 

What we have been able to determine is that the central ac- 
counts in question here that were controlled seemingly by Mr. Ber- 
lin moved $7.5 billion over the past three years, roughly three and 
one-quarter years, roughly even throughout the course of those 3^2- 
3^4 years. So the magnitude is very substantial under virtually any 
type of measurement. 

Chairman Leach. So these are the accounts controlled by this 
one individual? How many Russian banks are correspondents that 
you work with? 

Mr. Renyi. Today, Mr. Chairman, we have roughly 160 banks 
that we work with. That represents approximately 10 percent of 
the universe in Russia today. 

Chairman Leach. Yesterday a former CIA station chief indicated 
that his judgment was about 85 percent of the Russian banks are 
fraudulent, and the figures are a given kind of magnitude that 
have been talked about for some time, and that Russian banks in 
many cases are considered money laundering platforms. 

Do you have figures on dollar volume of Russian bank funds run 
through your bank? 

Mr. Renyi. We do, Mr. Chairman. Obviously through the course 
of this examination, we have literally pored over every type of sta- 
tistic that we can to develop a sense of dimension to this issue 
within our own organization. I think it gives some degree of dimen- 
sion as well to the issue overall through the U.S. banking system. 

With regard to our banks, our correspondent banks in Russia, we 
looked at specifically a timeframe of last July and last August, 
which coincides with the IMF payment last year, to determine 
what volumes were flowing through our accounts. And at that time 
it was $3.7 billion per day. 

Chairman Leach. $2.7 billion per day? 

Mr. Renyi. $3.7 billion per day on average and a fairly tight 
range, $3.2 to $3.8 biUion. 

Chairman Leach. How would this relate to say three months 
earlier and three months later? 

Mr. Renyi. It appeared to be very, very similar. There was a 
slight runup since the early part of 1998, but it has stayed very 
stable around that $3.7 billion. I might add that represents less 
than 1.5 percent of all of the dollars that we clear for all of our cor- 
respondents, which is about $600 billion. 

Chairman Leach. Of these amounts, how many would have had 
any origin in let us say from offshore banks, or are these directly 
from Russia? 

Mr. Renyi. This would all be from Russia. 

Chairman Leach. Directly? 

Mr. Renyi. These are all Russian. 

Chairman Leach. Using no intermediaries? 

Mr. Renyi. Russian domiciled organizations, yes, Mr. Chairman. 

Chairman Leach. Now you have an offshore subsidiary, is that 
correct, in the Cajnnans? 

Mr. Renyi. We have both a branch and a subsidiary trust com- 
pany. 



157 

Chairman Leach. For what reason would you have a branch in 
the Caymans? 

Mr. Renyi. The Ca3rmans branch is a funding vehicle for the 
bank overall. It is similar to virtually every Cayman branch that 
any U.S. bank would have. It strictly offers an ability for us to be 
able to quote different rates than what we have here in the U.S. 
The Cayman branch that we have is under the jurisdiction of the 
Federal Reserve. 

Chairman Leach. Now, today's Wall Street Journal reports that 
investigators were reviewing two accounts at your Cayman branch 
that are beneficially owned by Leonid Dyachenko, who is married 
to President Yeltsin's daughter and close political adviser Tatyana. 

The article suggests that the Cayman accounts were opened in 
the names of two offshore companies, the ownership of which ap- 
pears to be a bit unclear, and the deposits into the account came 
from two companies owned by Mr. Dyachenko and incorporated in 
the Caymans. These two companies are in turn reported to be af- 
filiated with the Russian company that published President 
Yeltsin's memoirs. 

Can you tell us, first, is it true that the Bank of New York main- 
tains accounts for Mr. Dyachenko in the Cayman Islands? 

Mr. Renyi. As you can imagine, Mr. Chairman, this is an excep- 
tionally sensitive issue. Because it is very much under the purview 
of the ongoing investigation, we by policy do not discuss relation- 
ships with any of our clients. That is a policy that is shared by vir- 
tually every bank that I am aware of, compounded by the issue 
surrounding the investigation. Obviously given the commentary 
today in today's press, what I can say is to confirm the fact that 
those two accounts do exist at the Bank of New York, that Cayman 
Island branch. Again, as any deposits that may be, any accounts 
in the Cayman Island branch is under the supervision and jurisdic- 
tion of the Federal Reserve, just as every branch in the United 
States is. 

Chairman Leach. Jurisdiction implies regulatory. 

Mr. Renyi. Regulatory review. 

Chairman Leach. But that is different than legal jurisdiction. 

Mr. Renyi. I am implying the regulatory review. 

Chairman Leach. I think that is a distinction that is of some 
profoundness. 

Did you make inquiries to determine who the beneficial owners 
were when these deposits were made? Did you know that at the 
time? 

Mr. Renyi. That, Mr. Chairman, I am again quite sensitive to, 
and I am not sure I am in a position to respond to that, again, 
given the ongoing investigation. 

Chairman Leach. This is just a question for the bank, to the 
bank's knowledge. 

Mr. Renyi. In terms of the bank's own actions, yes, we did. We 
asked and went through, to the best of my knowledge, and I have 
reviewed that, the typical routines that we have for know your cus- 
tomer, which includes an identification of the beneficial owner and 
source of proceeds. 

Chairman Leach. Do you maintain accounts, to your knowledge, 
for any other members of President Yeltsin's inner circle? 



158 

Mr. Renyi. To my knowledge, no. And I might add, we have tried 
to do as thorough an investigation over the course of the five weeks 
to try and identify any of those accounts. 

Chairman Leach. Is there anything unique about Russian bank 
correspondent relationships with your bank; that is, relative to 
other countries? Do you charge different fees? Do they have dif- 
ferent patterns of activity? 

Mr. Renyi. The style and the character of the business that we 
do with our Russian correspondents are very, very similar to what 
we do elsewhere in the country and elsewhere in the world, espe- 
cially as it relates to other emerging or developing countries. In 
those types of countries, our correspondent banking business tends 
very much to be in the deposit side of the dollar clearing, in provid- 
ing cash management services with a very modest level of credit 
exposure, and that does exist, that profile, that character is very, 
very similar — in Russia — similar to everyone else. 

In terms of the fees, we did also investigate. Again given the 
press reports that would indicate that significant amounts of profit- 
ability were gained from our Russian business, I looked very spe- 
cifically at fee comparisons as to what we have been able to charge, 
what we charge for our Russian correspondent banking business 
and elsewhere around the world and where we have found, with 
the exception of Europe, which is the most competitive portion of 
the world. Eastern Europe, generally in Russia, in particular, had 
the next lowest rate fee, rate of fees that we were charging. 

I asked why, and the immediate response is the competitive at- 
mosphere, given the fact that we are not the only organization that 
has similar banking relationships, correspondent banking relation- 
ships and dollar clearing accounts. 

Chairman Leach. Let me be clear about this. You just go to the 
numbers, because numbers can be numbing. We had $7.5 billion 
cleared through one account, and $3.5 billion a day through just 
general correspondent relationships with Russian banks? 

Mr. Renyi. Yes. 

Chairman Leach. To your knowledge, is this typical of other 
banks in New York, or are you different? 

Mr. Renyi. I believe it is typical, Mr. Chairman. The $7.5 billion 
that I referred to was a cumulative number over three years. The 
average volume per day was approximately $6 million. I think 
there is a need to compare that and characterize that in the con- 
text of our overall clearing, which I indicated was about $600 bil- 
lion a day for all of our correspondent banking relationships. 

Mr. LaFalce. Can I interject for one second, are you comparing 
$6 million to $6 billion per day? 

Mr. Renyi. In terms of the dollar clearing that we do, yes. 

Mr. LaFalce. I wasn't sure that I got the Ms and the Bs 
straight. Thank you. 

Mr. Renyi. There were three, three figures, three statistics that, 
Mr. Chairman, I think you were discussing, and that is the daily 
flow within the principal accounts of the so-called Berlin accounts, 
all of our correspondent banking within Russia and then our entire 
dollar clearing business enterprisewide, and that is $6 million for 
the Berlin accounts, $3.7 billion per day with regard to the Russian 



159 

banking correspondents, and $600 billion enterprisewide. We are 
the second largest dollar clearing organization in the U.S. 

Chairman Leach. As a financial company that is central to this 
worldwide movement of capital, what is your personal sense over 
the last three or four years of how Russia is behaving? Do you have 
a view that we have a problem in this great country of Russia, or 
is this something that the bank is neutral about? 

Mr. Renyi. Well, I suspect, Mr. Chairman, that just given the na- 
ture of the proceedings and what I heard last night on television 
of yesterday's proceedings and clearly seeing this firsthand myself 
this morning, it is not an uncomplex issue. There are a lot of other 
very countervailing forces here. Clearly there is an intention since 
1991 to bring Russia west, if you will, to effectively provide for 
them to offer to them a Westernized capital markets. 

We also have, I think, as an intention from a government-to-gov- 
ernment view to certainly support Russia in its view to democracy, 
what we have found in every other country that the strength of a 
democracy, the strength of an economy is based on its banking sys- 
tem, and, thus, when we were asked when we saw opportunities 
clearly as a commercial bank in the U.S. dealing with offshore com- 
ponents to be able to conduct business and then encouraged by nu- 
merous governmental agencies to be supportive with regard to the 
development of a capital market, we saw great opportunity, there- 
fore — and encouragement, and therefore we have been active as 
many banks, as very many commercial banks as well as investment 
banks within that Russian market. 

At the very same time, we clearly have been seeing the growing 
pains that exist within Russia as it has been in virtually every 
emerging country. Every developing country has gone through 
similar phases, if you will. The degree of volatility within the Rus- 
sian economy, Russian banking system may be somewhat unique. 
I am not sure I am the best person to respond to that. 

Chairman Leach. Let me just conclude with one kind of tying 
the numbers. You have indicated a figure for Russian banks, you 
have indicated a figure for the Berlin associated companies. Are 
there other Russian companies or individuals that you have figures 
for? 

Mr. Renyi. No, that is by far and away the statistics — there is, 
I don't believe, any relevant statistics, I think, relative to the issue 
on the table today. 

Chairman Leach. Thank you. 

Mr. LaFalce. 

Mr. LaFalce. Thank you very much. 

Let me make sure I have a correct, accurate grasp of the statis- 
tics. When you were referring to $6 million per day, you were refer- 
ring to one account, the Berlin account; is that correct? 

Mr. Renyi. To be very clear, it is several accounts, but it is es- 
sentially operated by one individual. 

Mr. LaFalce. About how many different accounts operate? 

Mr. Renyi. Approximately I believe there were eight in total. I 
think there were probably three or four active at any one time. 

Mr. LaFalce. I see. Are these bunched together in any comput- 
er's mind or any 

Mr. Renyi. Yes. 



160 

Mr. LaFalce. You would review those? 

Mr. Renyi. Absolutely, they were clustered to a point where we 
had one individual overlooking all of them. 

Mr. LaFalce. So we can look at the $6 million. And then the 
next data is $3.7 billion per day, is that correct, and that was for 
all Russian accounts? 

Mr. Renyi. All Russian correspondent bank accounts. 

Mr. LaFalce. Correspondent bank accounts, yes. 

Mr. Renyi. Yes. 

Mr. LaFalce. And then the third figure was $600 billion per day, 
and that was for all correspondent bank accounts; is that correct? 

Mr. Renyi. That is correct, sir. 

Mr. LaFalce. OK. Was there anything that in retrospect should 
have raised a red flag either to you or someone working under you 
or to the Federal regulator responsible for the Federal Reserve 
Board. 

Mr. Renyi. There certainly were flags that were raised not nec- 
essarily unfortunately to my level personally or to the regulators, 
but that there were individuals who supervised the account on a 
day-to-day basis who did see a marked increase in volume over 
what was originally reported to be or represented to be expected to 
go through those accounts. 

Those individuals who did raise the questions unfortunately 
raised them without really much vigor, without much follow- 
through, without raising it up through their own chain of command 
within their own organization. Our own investigation would indi- 
cate that those individuals took comfort in the fact that those ac- 
counts, particular accounts, were referred to by a very well re- 
garded bank officer, who happened to be Mr. Berlin's wife. 

Unfortunately, I can't get into the psyche of those individuals 
and in the minds of those particular individuals, but they did not 
see the obvious conflict that we might see in hindsight. 

Mr. LaFalce. All right, thank you. The Federal Reserve Board 
has the legal regulatory authority over the Bank of New York? 

Mr. Renyi. That is correct, sir. 

Mr. LaFalce. Now, A: what does that authority consist of with 
respect to accounts like this, and what is the nature of their peri- 
odic examinations of accounts such as this, most especially with re- 
spect to the money laundering laws? It is my understanding that 
the law enforcement officials criminally rely in large part on the 
regulatory authority's examinations to detect whether there is 
some criminal violation of the money laundering laws. 

Can you expound upon that? 

Mr. Renyi. Congressman, it probably is a very appropriate ques- 
tion, I suspect that even a better person to respond to that would 
be some Federal Reserve officers. However, from my perspective, as 
someone who is regulated by the Federal Reserve, my experience 
has been is that they would come in and review, in a very thorough 
manner, I might add, the process upon which we organize and 
manage our own organization. In certain areas such as credit ex- 
tension, they take an even further and more detailed review of our 
accounts. 

One of the very basic components of a Federal Reserve exam is 
reviewing the nature of the oversight process we have not only in 



161 

anti-money laundering or in Know Your Customer, but as well 
every other facet of our management approach to the bank. So they 
are very much intent on looking at our management team and 
looking at the organization. 

Mr. LaFalce. So their examination is more of system than ac- 
count examination? 

Mr. Renyi. That is correct. It is much more systemic, much more 
process-oriented reviewing the reports that I might see, other mem- 
bers of our management team might see. 

Mr. LaFalce. One of the difficulties is if criminal enforcers are 
reliant upon that examination, a systems evaluation is probably 
the least likely to discover some type of wrongdoing, I would think. 

Mr. Renyi. It would certainly discover if there was an3rthing that 
was truly systemic or endemic in the organization. There would be 
no question, I think, that the Federal Reserve and any regulator, 
whether it is the Fed or OCC or even our own State banking regu- 
lators in New York, would look at the situation to determine is 
there a systemic issue. If it is a case where there is an isolated 
issue with regard to a set of accounts, they may or may not pick 
that up. That is something clearly our own internal auditors should 
also pick up. 

Mr. LaFalce. Let me ask you two more questions, if I might try 
to ask them at the same time. On the one hand, we hold dear to 
the principle that all individuals are presumed innocent until prov- 
en guilty. On the other hand, you have to file Suspicious Activity 
Reports, and I am wondering how you draw the line, you know, 
where is the gray area, what do you do. That is the first question. 

The second question is this: I know that there are bankers 
groups that get together to discuss the appropriate use of deriva- 
tives, and so forth. Is there a group of bankers that gets together 
to discuss the approach that banks will take domestically and 
internationally with respect to money laundering? And the reason 
I ask this question is because if some banks are very, very rigorous, 
they just might not get the business, and so some other banks 
might be less rigorous and obtain the business. There could be a 
competition for laxity, both domestically and internationally, and I 
am just wondering if within the banking community there is any 
coordinating mechanism, group of CEOs, and so forth, that gets to- 
gether to discuss this. If everybody has to live by the same rules, 
it is great. If somebody doesn't have to live or doesn't live by those 
rules, they have an unbelievably unfair competitive advantage. 

Those are two questions I would like you to answer. 

Mr. Renyi. Let me answer the first, and that is with regard to 
any cooperative efforts. Personally I am not aware of any efforts at 
a chief executive or an executive management level, and I really 
don't have — no, I can't identify a particular group within the U.S. 
or certainly extraterritorial, outside the U.S., that meets specifi- 
cally on any money laundering issues. I think it would be a very 
good suggestion. It may or may not exist, and I would suggest that 
possibly some of our compliance officers within our organization 
who are attending these — we do have it, a local-level New York 
clearinghouse, we do have committees that look specifically at 
these issues. 



162 

Within the first question, with regard to SAR, and I think your 
point is with regard to privacy, specifically the regulations sur- 
rounding the Suspicious Activity Report filings require absolute 
privacy, absolute confidentiality for, I think, the very specific rea- 
son you are intimating here in that there could be a guilty-until- 
proven-innocent view toward any accounts we might file an SAR 
on. To that extent we are under strict guidance not to reveal filings 
of SARs, and I suspect for that very specific reason. 

Mr. LaFalce. Not to reveal to whom? 

Mr. Renyi. Not to reveal to the public. 

Mr. LaFalce. My question is whether you reveal them to the 
public. You do file them. You are mandated to file them. Who do 
you file them with, and how do you make the judgment as to 
whether to file or not? If I go to, you know, three different case- 
workers, and I ask in my district how many cases do you have, I 
find out each of them has a different measurement as to what con- 
stitutes a case. Some might say a phone call does, somebody else 
might say it is not a case unless I have to work on it for at least 
a week or so, and I am just wondering what goes on in your bank's 
mind in determining whether or not to file a Suspicious Activity 
Report report, and is there any commonality that is enforced by the 
regulators on this issue? 

Mr. Renyi. Well, Congressman, I don't believe that there is, and 
I don't know the regulations precisely, but I know what we do and 
how we do it, which leads me to believe that there is not nec- 
essarily a preset criteria of review that each bank must follow in 
order to file an SAR. I say that because we have filed many, many 
hundreds of SARs over the past year or two. Most recently, obvi- 
ously, given the incredible oversight that the press reports and this 
investigation has created, we are filing many, many more for sim- 
ply the reason that we see that a particular account may have re- 
ceived a debit or a credit from a name that we see in the press, 
and to err on the cautiousness side, we would file an SAR. 

Mr. LaFalce. Thank you. 

Chairman Leach. Mrs. Roukema. 

Mrs. Roukema. Mr. Chairman, you indicated in your introduc- 
tion that you had an element of awkwardness here because of the 
status of the bank. I have another element of awkwardness here, 
which I only learned about last night, and that is that Mr. Renyi 
is a constituent of mine. I learned that last night. This makes ques- 
tioning a little awkward, but I think we can speak frankly and di- 
rectly in the interest of getting full information so that we can do 
our job and that you can do your job. I recognize that the bank is 
under investigation, but no charges, as you quite correctly pointed 
out, have been made. 

But it seems to me, with all due respect, I do have to point out 
you just ended your discussion with Mr. LaFalce with respect to 
the Suspicious Activity Reports, and I don't know exactly how this 
fits in, but it seems to me that it should have been caught earlier, 
because it was over a period of years, involving billions of dollars, 
and with the fact that Mr. Berlin and Lucy Edwards, and officer 
of the bank, were married. It would seem to me that there should 
have been some understanding of the potential for the conflict of 
interest. Can you tell me either how you dealt with that and why 



163 

you dismissed the need for the SARs to be filed and how you now 
would apply it in view of the experience and the new knowledge 
that you have in understanding? 

And then I want to go on to the global pa3anent system. 

Mr. Renyi. There are really, Congresswoman Roukema, there are 
two issues I think you raised in that question, and that is, one, the 
filing of an SAR, and then the conflict of interest. The SAR, to 
begin with, during the course of those three years of activity within 
those Berlin accounts, there is no question that people at a lower 
level, people who are looking over the operations of that account, 
raised issues, raised questions as to the validity or the rationale as 
to why the volume, vis-a-vis an export/import company or a tour 
company, of which he variously over a period of time identified 
himself as, why that volume would exist. So that we do see people 
in our organization, again retrospectively, who have identified an 
issue, but not sufficient follow-through, and I think that is where 
clearly the awkwardness, the embarrassment on our part, mine in 
particular, as to why those individuals saw fit not to report that 
up the chain of command which ultimately would have resulted in 
an SAR, it did not get up to a level which was the compliance offi- 
cer in those particular areas, and that is, I think, the awkward 
question here, why an SAR was not filed. 

Mrs. Roukema. How can we reform that system in this legisla- 
tion that we are dealing with? I am an enthusiastic co-sponsor, but 
I am not quite sure anything in this legislation will deal with tar- 
geting that responsibility. 

Mr. Renyi. That is very much of an internal issue, Congress- 
woman. I don't think I saw in the brief read of the legislation pro- 
posed elements that deal directly with that. Having said that, I do 
think it is very much incumbent upon the organization itself not 
only to have the process which we do, but the culture of being in- 
quisitive, of questioning, of ensuring that every question that has 
to be asked is asked, and that no assumptions are made. The fact 
that people made an assumption that a well-regarded officer of the 
bank referred these accounts, gave an ability of that individual to 
be less concerned, that should not happen. 

Mrs. Roukema. I think this bears more review and study by 
those of us on the committee, but let me get to what you have quite 
correctly pointed out very well. 

I believe, although I am not quite sure, that I understand the 
specifics of your recommendations about not only the nature of the 
global payment system, but the increasing complexity of it. I think 
you called it the opaque nature of it. 

Mr. Renyi. Yes. 

Mrs. Roukema. And of course the huge daily volumes are in- 
creasing. I am not sure, have you given us some specific rec- 
ommendations as to how we can deal with this legislatively, or is 
it just through regulatory authority? 

Mr. Renyi. I have not offered what I would call great specifics 
or a great detailed recommendation with regard to the global pay- 
ment system. Its characteristics of being huge, complex, immediate 
and instantaneous in its style for some very explicit reasons, be- 
cause of its size, because of the cost of errors, the high cost of er- 
rors, the need for straight-through automatic processing also offers 



164 

it this opaqueness that I referred to in my remarks and in my tes- 
timony whereby the information that is obtained from the global 
payment system in terms of the remitter and beneficiary of pay- 
ments is quite abbreviated, very much in the form of digital code 
rather than more, in layman's terms, identifiers, words describing 
who owns the account, where is that money going to. 

There are some very good reasons for that to happen, because as 
one puts words, sentences in direction and instructions as to where 
moneys go, there is the greater opportunity for error, and therefore, 
again, in an effort to ensure that there is a greater level of 
straight-through processing or automation, there has been this re- 
duction of information that one might see as usable. 

Having said that, I think the core of my recommendation here 
for the committee and the Congress to consider is access to the 
payment system, because once access is granted, once an individual 
has an ability to enter into the payment system, it is easily lost 
track of because of the nature of the system. 

Mrs. ROUKEMA. So you mean controlling the access? 

Mr. Renyi. Controlling the access, having greater, maybe more 
stringent requirements in terms of access to the system. 

Mrs. RouKEMA. I think the Chairman's bill does go into some of 
that. I don't know if it is as comprehensive as we might want to 
make it, given what happened here, but we do begin to — and 
maybe it is as much as we can do in that respect — make a lot more 
unlawful about falsification of identity in transactions with the 
banks. We will look at that again. Thank you very much. I appre- 
ciate your assistance here. 

Chairman Leach. Thank you. Marge. 

Mrs. Maloney. 

Mrs. Maloney. Thank you, Mr. Chairman. 

The Bank of New York case troubles me for a number of reasons. 
As we all know, the bank has played a ground-breaking role in the 
history of American finance. For over two centuries New Yorkers 
have entrusted the bank with their life savings. This is not a bank 
whose culture would be expected to lead itself into the center of a 
major scandal. The fact that such an incident would occur at such 
a respected bank is frightening to me. We have to wonder if this 
case is simply the tip of the iceberg. 

While the guilt or the innocence of the parties involved is far 
from determined, it would appear that insiders in the bank were 
able to avoid detection until foreign investigators tipped off our 
Government. In other words, our money laundering laws would ap- 
pear to break down when confronted with insider dealing. Would 
you agree with that, that our laws are not sufficient now, and they 
break down with insider dealing? 

Mr. REhfYi. Well, Congress woman, I would say that virtually any 
law, virtually any regulation that would be imposed on any finan- 
cial institution is at risk if there is, in fact, inside assistance. It is 
awfully difficult to deal with many of these issues in any way, but 
when there is the possibility, and I must be very careful here not 
to imply that there exists in our case here, but if that were to take 
place, it makes it even doubly difficult to deal with. 

Mrs. Maloney. To what extent was your institution's anti-money 
laundering policy reviewed by the Federal bank regulators? You 



165 

testified earlier that they were looking at the systemic rather than 
actual transactions, but was there regular oversight, and was your 
bank ever cited as insufficient? 

Mr. Renyi. There has been regular oversight. The Bank of New 
York has never been cited for inadequate anti-money laundering or 
Know Your Customers policies. It should be obvious to everyone 
that given the intense reporting with regard to this particular 
issue, that regulators have redoubled their efforts in terms of re- 
viewing our systems internally, and I am confident that we will do 
well here. 

Mrs. Maloney. Chairman Leach, as we know, as has been cited 
earlier, is proposing legislation that would require financial institu- 
tions that open U.S. accounts to identify the beneficial owners of 
the accounts. It would also prohibit U.S. banks from opening cor- 
respondent accounts with so-called brass banks that are not subject 
to comprehensive home country supervision. How would these re- 
quirements impact upon your bank's operations on a day-to-day 
basis? 

Mr. Renyi. Well, I think, Congresswoman, to respond succinctly, 
quite little, because our business is not to do business with these 
brass-plate blanks in these offshore areas. So greater scrutiny, 
greater restrictions or requirements in terms of review of these 
particular banks would have certainly no negative impact, and I 
would welcome the opportunity to comply with those. 

Mrs. Maloney. The requirement to identify the beneficial owners 
of the accounts, would that impact on your day-to-day operations 
at all? 

Mr. Renyi. That may. I would need to know clearly a bit more 
of the detail as in virtually every piece of legislation that would im- 
pact the banking system. It depends upon the application, the 
evenness of the application, which then goes to other banks pos- 
sibly outside the U.S. banking system, and certainly our ability to 
comply with those. 

Mrs. Maloney. To what extent do you believe money laundering 
is taking place in the United States banks, and what can be done 
to prevent bank officers from facilitating laundering? You testified 
that the two provisions I mentioned in the Chairman's proposed 
legislation have little impact, but what would you suggest should 
be done, and how extensive do you think? 

Mr. Renyi. When I say little impact, I really mean. Congress- 
woman, that it would not negatively impact the Bank of New York; 
not the fact that it wouldn't be effective, but it would not pose a 
problem for us to be able to comply generically with that approach. 

But I think your question with regard to the presence or the size 
of money laundering, that is an exceedingly difficult question, of 
course, to respond to. I think one of the issues that I sense is being 
debated here and that I offered as a possible public policy issue is 
the definition of money laundering, the distinction between money 
laundering and capital flight, some of which is, in fact, illegal, some 
of which has no restrictions by the host country. There is also the 
issue of being able to discern through the information that we 
would normally receive in the global pa3nTient system moneys that 
are sent to support legitimate business transactions or to support 
business transactions that are structured in the way to avoid local 



166 

law, local taxes. That is a very difficult thing to distinguish in the 
best of circumstances. 

So the issue of money laundering, and I go back, obviously, to 
our experience with these particular sets of accounts, given the 
vast amounts of data that we have reviewed, it is very difficult to 
determine which might be money laundering, which might be cap- 
ital flight, which might be legitimate business transactions, and I 
suspect it might very well be some of each. 

Mrs. Maloney. My time is up. Thank you. 

Chairman Leach. Thank you, Ms. Maloney. 

Mr. Bereuter. 

Mr. Bereuter. Thank you, Mr. Chairman. 

Mr. Renyi, thank you. I heard your entire testimony and the 
Chairman's questions from the side, if I wasn't here directly. I will 
ask as many questions as I can here. 

First of all, as I understand it, if a bank processes a transaction 
knowing that it is designed to conceal or disguise the nature of the 
proceeds, the bank could be charged criminally or have their char- 
ter revoked. Did anyone at the management level in your bank 
know of Russian money laundering through your bank? 

Mr. Renyi. Absolutely not, Mr. Bereuter. 

Mr. Bereuter. Thank you. 

Now, Barclays Bank announced last week that it is closing a sub- 
stantial number of its accounts to Russian corporate customers out 
of concern that it cannot verify where funds are coming or going 
to. Has the Bank of New York considered scaling back its presence 
in Russia in light of the recent allegations of possible misuse of 
Russian-related accounts at the bank? 

Mr. Renyi. Well, Congressman, I think again you can imagine 
the amount of review and oversight that is taking place within our 
own organization, throughout our organization with regard to these 
types of accounts. These types of corresponding relationships, it 
does not simply focus on Eastern Europe by any means. Having 
said that, clearly we are taking a second look, another look at each 
and every one of our relationships to ensure that they do comply 
with the highest levels of compliance, not only with anti-money 
laundering, but Know Your Customer requirements. 

Mr. Bereuter. Thank you. 

Earlier, I think you gave a statistic of $3.7 billion from Russian 
correspondent banks on a daily basis. Now, that would not include 
corporate customers or other accounts coming from Russia or from 
Russian citizens; is that correct? 

Mr. Renyi. We do not have corporate accounts in Russia. Any de- 
posit relationship that we have, which I referred to the $3.7 billion, 
are strictly from the banking system. It is our policy only to do 
business on correspondent banking business with regard to credit 
and deposit-taking. 

Mr. Bereuter. Thank you. 

Do you have correspondent banking relationships with entities 
domiciled in Antigua, Cyprus, and/or the Ca3anan Islands? 

Mr. Renyi. With regard to Antigua, I believe we have one rela- 
tionship. It is a relatively dormant one, very little transactions 
flowing through it. Cayman Islands, I am not quite sure. I do not 



167 

believe we do. Cyprus, I believe we do, but I am not — I don't have 
the precise figures. I will be happy to come back with those. 

Mr. Bereuter. Thank you. 

Has Mr. Bruce Rappaport assisted the Bank of New York in the 
past in developing clients or other business relationships in Russia 
or in Antigua? 

Mr. Renyi. I understand the source of that question, given the 
press reports, but I can say that there has not been any involve- 
ment by Mr. Rappaport with regard to our Russian efforts. I think 
it was — as it was reported in the press — he assisted us in establish- 
ing our presence in Russia. That, in fact, was simply us being able 
to sublet some of his space that his bank, the Inter-Maritime Bank, 
has in Moscow for a one-year period. It does not go beyond that. 

Mr. Bereuter. You mentioned him in your statement. 

Mr. Renyi. I did. 

Mr. Bereuter. You also mentioned his Ambassadorial role from 
Antigua to Russia and so on. 

You had a little discussion before based on Mr. LaFalce's ques- 
tion related to the Suspicious Activity Reports, the SARs. Were any 
SAR reports or potential reports suppressed by management in 
your bank? 

Mr. Renyi. Absolutely not, sir. 

Mr. Bereuter. If you had a deposit of, say, in excess of $5 mil- 
lion in currency coming to your bank, would it automatically or 
likely generate an SAR? 

Mr. Renyi. $5 million in currency? 

Mr. Bereuter. Currency. 

Mr. Renyi. Clearly would, absolutely. In fact, there is a regula- 
tion of deposits of $10,000 or more in currency, a report must be 
filed. 

Mr. Bereuter. Thank you. 

I want to understand a little bit more about the relationship on 
Russian correspondent banks. Has the bank assisted any Russian 
banks in attempting to open representative offices in the U.S.? 
Have any applications been successful? 

Mr. Renyi. We have, in fact, provided letters of recommendation 
to certain of our correspondent banks in Russia to open offices in 
the U.S. This has been part of the overall process of bringing the 
Russian banking system to the West to be able to allow them to 
conduct business along Western-styled banking. In some instances 
we have made those representations, but, again, only to those 
banks with whom we do business with and that we are comfortable 
with. 

Mr. Bereuter. But some would have been successful as far as 
you know? 

Mr. Renyi. I believe some of them may have been successful. I 
don't know the specifics. 

Mr. Bereuter. I have one more question related to correspond- 
ent banks, if I may proceed. 

Chairman Leach. Please go right ahead. 

Mr. Bereuter. Thank you. 

I would like to understand what kind of advantages or privileges 
of services go along with being a correspondent bank to the New 
York bank, especially, of course, those related to Russian cor- 



168 

respondent banks. What privileges or services do they have by vir- 
tue of their correspondent status go through your bank? 

Mr. Renyi. As a correspondent, the typical correspondent bank- 
ing services that we offer certainly include dollar clearing, a prin- 
cipal service and really the heart of our correspondent banking 
business. In certain instances, we also might provide short-term 
credit on an overnight basis. We might very well provide foreign 
exchange transactions as well and possibly certain securities serv- 
icing arrangements with that. In terms of privilege, we view it as 
a privilege for them that they can list the Bank of New York as 
a correspondent, because it is, in fact, I think, a very rare, very 
privileged view that they can, in fact, use us as a correspondent, 
effectively access to the banking system, and again speaks to the 
diligence we do on a continuing basis. 

Mr. Bereuter. Thank you. 

Thank you, Mr. Chairman. 

Chairman Leach. Thank you. 

Mr. Forbes. 

Mr. Forbes. Mr. Ren3d, again, thank you for being here today, 
and I particularly appreciate that in your capacity you have taken 
full responsibility for straightening out the situation that led to the 
unfortunate revelations. And I think all of us were shocked that 
this undertaking was transpiring at the Bank of New York, cer- 
tainly a venerable institution, well respected not just nationally, 
but internationally. 

But let me just say that I learned today that more than I ever 
realized that money laundering is extremely widespread in this 
country, and that it is affecting far too many, and one is too many, 
but far too many of our financial institutions. 

Since these revelations, have you heard from some of your col- 
leagues across the country as they have maybe taken a long, hard 
look at their internal systems and lamented that perhaps they 
could be as vulnerable as the Bank of New York was, and do you 
have any sense in a way of validating what I think many of us 
have grown to understand, money laundering is a very, very wide- 
spread, serious problem in this country? 

Mr. Renyi. Well, it certainly has piqued everyone's interest, Mr. 
Forbes. I think there is no question, and I can say universally with- 
out exception, every one of my counterparts that I have come into 
contact with over the last five weeks have said that this has clearly 
initiated a review internally. So if there is anything good that can 
come out of this particular issue, that of Bank of New York being 
the poster child for money laundering, unfairly I hope, certainly be- 
lieve, then the fact that there is much more greater intention of 
looking at intensive review of internal operations throughout every 
bank in the country. 

Mr. Forbes. Well, certainly an institution like the Bank of New 
York, I have no doubt that perhaps this certainly caused you and 
all of your officials to step back for a moment. I noticed in your tes- 
timony, as you said, it is very difficult to identify, you know, origi- 
nation and destination of accounts, and I know that the domestic 
banking community has wanted very much to partner with emerg- 
ing nations and particularly nations like Russia which are trying 
to be more democratic and get more marketplace — free-market en- 



169 

terprises going, and particularly reforming the banking industry 
there. But has there been consideration by your bank to suspend 
any business with Russia or any transactions that would come 
from Russia? 

And just to add to that, and I know that is perhaps a pretty dra- 
matic consideration, but I think you made clear also that it is very 
difficult, for example, to track and review transactions that come 
from some preset identifiers like Cuba and Havana and Baghdad 
and Iraq, and I think the larger question is do financial institutions 
in the wake of what has happened at Bank of New York and others 
seriously consider that maybe there are some places where we just 
don't accept transactions? 

Mr. Renyi. At first — the last question in terms of is there an ef- 
fort to seriously consider refusing transactions from certain coun- 
tries? The short answer is yes. I think that it is a matter of what 
is the risk and can we really accept that risk. And I think it is 
clear, given the circumstances here, that may very well be areas 
that that is an unacceptable risk under any circumstances, and I 
don't mean in terms of profitability or awards, but simply risk to 
the organization, reputational risk, which is clearly what we have 
here to deal with at the Bank of New York. 

Mr. Forbes. On another approach here, you know. Congress has 
this talent for when we see some kind of problem like we have seen 
with the Bank of New York and money laundering, that, you know, 
we want to go back in and rewrite some laws and make sure we 
are tougher on those laws. And I embrace those efforts, but it is 
hard not to think that maybe a good deal of this was tragic human 
oversight as far as the supervisors go and certainly outright crimi- 
nality on others' part. But did the system break down, Mr. Ren5d? 
Do you think the system broke down? 

Mr. Renyi. Congressman, my view at this juncture and time is 
it is a preliminary review, given the fact that the investigation con- 
tinues not only externally, but internally, that systems were in 
place. They did not necessarily break down, but their implementa- 
tion was far less than perfect. Clearly the implementation was 
flawed. It allows us an opportunity, though, to enhance the sys- 
tems, to be able to do what we can to take out the personal element 
in the oversight. I think that generally is an approach that we con- 
tinue to follow in getting enhanced systems with artificial intel- 
ligence, behavioral analysis, so that we are taking the human ele- 
ment out of it. We are also attempting to take the relationship ele- 
ment out of it so that no one in the future has the ability to rely 
on any one other member of the organization for comfort as to the 
validity of a transaction or an account; the establishment of an 
anti-money laundering committee, of very senior people throughout 
the organization that has a mandate far broader and independent 
than ever before, certainly in our organization and, I suspect, any- 
where else. 

Mr. Forbes. Thank you, sir. 

Chairman Leach. Thank you, Mr. Forbes. 

Mr. Lazio. 

Mr. Lazio. Hello, Mr. Renyi, nice to see you again. I wanted to 
ask you — I would like to clarify a few points, if I heard you cor- 



170 

rectly testify that the Bank of New York had no Russian corporate 
accounts. Was that accurate? 

Mr. Renyi. Banking accounts where we either extend credit or 
accept deposits. 

Mr. Lazio. ok. Wire transfer account. 

Mr. Renyi. We would not have a wire transfer account. What we 
would have would be the ADR-DR sponsorship relationships, which 
are an administrative function. It is a processing function where 
we do not accept deposits or extend credit. 

Mr. Lazio. Of these nine accounts, I understand it that they 
were controlled or in the name of Peter Berlin? 

Mr. Renyi. Yes. 

Mr. Lazio. How would you characterize those accounts? 

Mr. Renyi. Those are U.S. domestic accounts. They are compa- 
nies that are incorporated here in the U.S. We would view those 
as domestic accounts, and, in fact, when they were opened, they 
were opened by a Russian national who subsequently became natu- 
ralized as a U.S. citizen. The business may be transaction-oriented 
in an offshore, but it would be viewed as a domestic U.S. company. 

Mr. Lazio. Now, let me ask you, is it possible for somebody, for 
an accountholder who has got a wire transfer account, to execute 
a wire transfer with a terminal off premises of the Bank of New 
York without the knowledge or assistance of a Bank of New York 
employee? 

Mr. Renyi. We do have that service. It is a service that we, as 
well as — and we have checked this — ^virtually every other bank pro- 
vides this particular type of service, which is a software-based serv- 
ice where we provide software for installation on personal comput- 
ers, on-site locations which an individual can in fact initiate and 
execute transactions of wiring moneys out of their account, out of 
the bank to other accounts. 

Mr. Lazio. Without the knowledge of the bank contemporaneous? 

Mr. Renyi. Contemporaneous. What is done is clearly a due dili- 
gence as it relates to who we are giving that service, offering that 
service to, so that there is a criteria that we use providing for 
whether that service is, in fact, appropriate for that individual or 
that corporation. Once that is taken care of, once we have satisfied 
ourselves, then that is done outside the bank without necessarily 
Bank of New York personnel intervention. There is oversight as we 
see the volumes, and as we said, we are instituting systems which 
will then have an oversight of those accounts to determine wheth- 
er, based on certain parameters, certain criteria, that will trigger 
a specific oversight for that account. 

Mr. Lazio. So there is sort of an historical review that occurs on 
accounts, whether it is wire transfer accounts? 

Mr. Renyi. That is correct. 

Mr. Lazio. And could you just sort of describe briefly for me, if 
it is your own knowledge, what the due diligence principles might 
be for such an account? 

Mr. Renyi. Knowing what business the individual is conducting, 
the volumes, the amounts of, the volumes that that individual 
would, in fact, be utilizing the service for. 

Mr. Lazio. That request would be up front. 



171 

Mr. Renyi. That would be up front before the installation is 
made. 

Mr. Lazio. Does a bank require documentation up front as well? 

Mr. Renyi. Certainly all those reports would be noted, the docu- 
mentation in terms of certificates of incorporation, the legality of 
that. 

Mr. Lazio. Might you ask for documentation establishing wheth- 
er a corporation or the entity is properly licensed in a particular 
State? 

Mr. Renyi. If required, if we know that a license is required, 
then we would request that. 

Mr. Lazio. And is there a system, internal system, in check? 

Mr. Renyi. Again, there is tremendous reliance on the individual 
and the relationship manager who was initiating that relationship 
to deal with that. 

Mr. Lazio. Now, this is an account, Torfinex? 

Mr. Renyi. Yes. 

Mr. Lazio. Do you know if the bank followed that type of protocol 
on that case? 

Mr. Renyi. Well, that is certainly part of the investigations that 
we are going through right now. So I am really not sure I am at 
liberty to talk specifically about that particular account that is sub- 
ject to investigation. 

Mr. Lazio. Let me ask you this last question if I can, because 
this is a question that was raised yesterday involving Bruce 
Rappaport, who has a very interesting background, and I am just 
wondering if you can tell me what the present and historical rela- 
tionship of Mr. Rappaport might be with the Bank of New York; 
and if I could briefly follow on to that, if there has been a relation- 
ship. To the best of your knowledge, has there been any attempt 
by Mr. Rappaport to influence the hiring and placement of Bank 
of New York employees? 

Mr. Renyi. Let me address the latter question first in that there 
has been no evidence, no instance of influence that Mr. Rappaport 
has had over not only the bank hiring people, but also business 
transactions. 

Mr. Lazio. Could you answer the first question? 

Mr. Renyi. Our initial relationship with Mr. Rappaport was as 
he was a substantial owner of bank shares quite a few years ago. 
It is now, we believe, less than 1.3 percent, possibly lower in terms 
of relationship. At this juncture our principal relationship with Mr. 
Rappaport is as a shared owner of a bank in Switzerland where we 
have a 28 percent interest. He has the remainder. 

Mr. Lazio. What is the name of that bank? 

Mr. Renyi. BNY Inter-Maritime Bank. 

Mr. Lazio. Thank you very much. 

Chairman Leach. Mr. Barr. 

Mr. Barr. Thank you, Mr. Chairman. 

Mr. Renyi, according to reports, and I think these figures have 
been gone into earlier, upward of $7.5 billion may have flowed 
through nine suspicious accounts at the Bank of New York over a 
three-year period beginning in 1996. Let us assume on the conserv- 
ative side that it is $7.5 billion and not more than that. How much 
would the bank have earned in various commissions, points, inter- 



172 

est income of any sort for that $7.5 billion flowing through its ac- 
counts? 

Mr. Renyi. We would have — the fees, the gross fees associated 
with that would probably be about $500,000 per annum. 

Mr. Lazio. What about interest on any of that money that was 
parked for any length of time? 

Mr. Renyi. To the best of my understanding is that this was not 
an interest-bearing account. 

Mr. Barr. So $7.5 billion would have resulted only in one-half- 
a-million dollars total? 

Mr. Renyi. Of gross revenue, yes, sir. 

Mr. Lazio. Per year. 

Mr. Renyi. Per year, out of a total of fee revenues. This would 
be fee revenues, Congressman, and last year our fee revenues was 
approximately $2.5 billion. It is a relatively modest account. 

Mr. Barr. I am sorry, what? 

Mr. Renyi. Relatively modest account, $500,000 in fees against 
a total fee revenue of the bank of about $2.5 billion. 

Mr. Barr. That is not inconsequential certainly. 

Mr. Renyi. It is not inconsequential in its absolute terms. 

Mr. Barr. Has there been any discussion at all with any Federal 
officials of immunity for the bank, any agreement not to prosecute 
any potential cases here for either committing illegal acts or failing 
to take steps to prevent illegal acts, such as failure to file SARs? 

Mr. Renyi. I am not aware of any immunity offer to the Bank 
of New York in its investigation. 

Mr. Barr. OK. Apparently, at least two individuals, Lucy Ed- 
wards and Natasha Kokolovsky, have been terminated by the bank; 
is that correct? 

Mr. Renyi. One of them has, Lucy Edwards, and Natasha 
Kokolovsky 

Mr. Barr. Has been suspended? 

Mr. Renyi. Is on a paid leave of absence. 

Mr. Barr. Has she been suspended? Was that at her request, or 
did the bank take that action? 

Mr. Renyi. The bank took that action when the accounts in ques- 
tion were closed and the investigators asked that we secure files, 
and we felt it was in everyone's best interest that that take place. 

Mr. Barr. Why was Ms. Edwards dismissed? 

Mr. Renyi. When we were able to do our own private investiga- 
tion, we reviewed her personal files and discovered paperwork that 
gave us evidence that she misrepresented the bank in a number of 
instances. Most particularly, we found out after the fact that she 
actually had signing authority on one or several of the accounts. In 
order for a staff member to have signing authority of an account — 
other than their own personal account — requires the approval of 
the chairman of the board. We have an annual code of conduct 
questionnaire that must be filled out with an affiliation report. 
Those affiliation reports that would have required her to disclose 
that were never filled out properly, did not disclose that. That is 
clear evidence, and a clear case for termination as violations of our 
code of conduct. 

Mr. Barr. She is married to a Russian businessman who con- 
trolled nine accounts at Bank of New York; is that correct? 



173 

Mr. Renyi. That is correct. 

Mr. Barr. And how long a period did that relationship exist be- 
fore the bank finally terminated Ms. Edwards? 

Mr. Renyi. Well, I believe we were not quite sure, Congressman, 
when they were married. I believe it would have been 1992, 1994, 
somewhere in that timeframe. So when she obviously married, 
right up to the point of termination. 

Mr. Bare. Are either of these individuals, Lucy Edwards or 
Natasha Kokolovsky, under investigation by Federal authorities? 

Mr. Renyi. I believe I would have to say it is not something I 
can respond to. 

Mr. Barr. Do you know? I mean, do you know whether or not 
they are 

Mr. Renyi. I do know whether there has been contact between 
themselves and Federal investigators. 

Mr. Barr. There has been contact? 

Mr. Renyi. There has been contact. 

Mr. Barr. With regard to the questions that has already come 
up in several instances here today regarding SARs and the require- 
ment that the Bank of New York has, as other financial institu- 
tions, to file SARs under circumstances either laid out in the stat- 
utes and then the forms with which, I presume, all of your bank 
officers, including the names we mentioned today, are familiar? 

Mr. Renyi. Yes. 

Mr. Barr. Was there anything in these series of transactions 
that we have been talking about here with Benex, for example, 
that wasn't suspicious? 

Mr. Renyi. The nature of these accounts, again through prelimi- 
nary review since the last five weeks — the accounts, while large in 
amount, did not in and of itself pose a reason for suspicion in terms 
of either significant increases or changes in the flow through the 
accounts, it didn't necessarily warrant that, but that happened to 
be the judgment of an individual who followed those accounts on 
a day-to-day basis. 

Mr. Barr. Who is that? 

Mr. Renyi. An individual in our service area, individuals in our 
service area. 

Mr. Barr. Do you know their names? 

Mr. Renyi. Yes, sir. 

Mr. Barr. I mean, you have gone back and looked at these, and 
you are saying that — I think there is just an initial round of Fed- 
eral subpoenas produced over 3,500 pages of transactions for just 
one of these accounts with Benex involving huge sums of money — 
and you are saying that there was nothing suspicious about these 
transactions? 

Mr. Renyi. No. I shouldn't — if I said that, I misstated myself. 
Clearly in retrospect, after review of all of those transactions over 
the three-year period of time, no question there was something sus- 
picious about it, and this — in fact, we filed a Suspicious Activity 
Report. 

Mr. Barr. After this had already come to your attention? 

Mr. Renyi. That is correct, during the course. 

Mr. Barr. By the authorities? 



174 

Mr. Renyi. During the course of the three years of that, we did 
not file an SAR. 

Mr. Barr. Now, are you satisfied that, in the words of, I think, 
our colleagues from the other side of aisle from New York, that this 
was just a tragic human error? 

Mr. Renyi. I believe that it appears to be, again, given my re- 
views today, an element of poor judgment. 

Mr. Barr. Why would these employees be terminated then if peo- 
ple were just involved in a series of tragic human errors? You cer- 
tainly wouldn't terminate people for that reason, would you? 

Mr. Renyi. The people that were terminated were terminated for 
reasons having nothing to do with the conduct of the account. Con- 
gressman. 

Mr. Barr. Nothing to do with the conduct of any of these ac- 
counts, even the Benex accounts? 

Mr. Renyi. That is correct. 

If I can restate with regard to Ms. Edwards, Ms. Edwards was 
terminated by us because of violations of the code of conduct sur- 
rounding the fact that she did not advise us that she was a signer 
for these accounts. She did not have any day-to-day activity or in- 
volvement in these particular accounts. 

Mr. Barr. So it wouldn't really be accurate to say that she was 
not fired for any reason connected at all with the Benex accounts; 
there is a connection there, is there not? 

Mr. Renyi. There is a connection there to the extent she was a 
signer. 

Mr. Barr. Through her and through her husband. 

Mr. Renyi. And did not reveal that. 

Mr. Barr. And through her husband there was a connection ob- 
viously. 

Mr. Renyi. Yes, but that isn't necessarily grounds for termi- 
nation. 

Mr. Barr. But it certainly is grounds in retrospect for some rath- 
er significant suspicions. 

Mr. Renyi. Correct. That is not to be debated. 

Mr. Barr. I just have a general question. Would you say that any 
of the following are secondary to earning fees or making profits for 
the Bank: One, protecting our Nation's security, is that secondary? 

Mr. Renyi. Absolutely not. 

Mr. Barr. Compliance with our criminal laws? 

Mr. Renyi. Absolutely not. 

Mr. Barr. And protecting taxpayer funds? 

Mr. Renyi. Absolutely not. 

Mr. Barr. Thank you. 

Thank you, Mr. Chairman. 

Chairman Leach. Thank you. 

Mr. Royce. 

Mr. Royce. Thank you, Mr. Chairman. 

Mr. Renyi, in your statement you describe how certain proce- 
dures that the Bank of New York follows to ensure due diligence. 
Basically, I guess, one of those procedures is reviewing financial 
statements and other regulatory filings. 

Mr. Renyi. Yes, sir. 



175 

Mr. ROYCE. Reported yesterday is a story about the Bank of New 
York's efforts to help a Russian bank sell shares to investors and 
the way this aggressive pursuit was undertaken, but what is un- 
usual in the story is that at the same time that your bank was 
doing that, Inkombank, the Russian bank, was undergoing its own 
review, and the financial status was being challenged in Russia, 
and Russian bank regulators that were investigating the bank had 
found that it had violated numerous rules, including inflating its 
income. In fact, the report recommended curtailing the bank's oper- 
ations, and the bank has since been declared insolvent. And what 
is unusual here is, I think, the question, why would you pursue 
under these circumstances this particular customer, and why 
would you help it win regulatory approval in the United States to 
sell its stock in the U.S. as American Depositary Receipts in 1996? 

Mr. Renyi. Well, Congressman, the response is somewhat of a 
lengthy one, because I need to go into just a little bit the nature 
of the depositary receipt service that we offer, very easily confused 
and misinterpreted, against the investment banking opportunity 
where an investment bank would, in fact, sell securities or under- 
write securities. In our case and in the case of any depositary re- 
ceipt sponsor, what we provide is what I would call the plumbing 
associated with the capital market transaction, where we are the 
individual that provides information, provides the recordkeeping 
for the legal transfer and registry of ownership of those securities. 
We in no way underwrite, sell, or issue securities on behalf of any 
of our clients that we are depositary receipt sponsor for. 

Mr. ROYCE. Let me ask you another question. You stated in your 
testimony that since the Bank of New York has been conducting its 
own investigations, a vast amount of data has been examined, but, 
quote, it is simply not possible for this data to identify the source 
or legality of any individual transfer of funds once a bank grants 
a customer access to its payment system. It is extremely difficult 
to track the flow of funds or to stop a transaction before it happens. 

Are there any steps that the Bank of New York has taken to 
remedy this situation, or is it a foregone conclusion that we cannot 
track the flow of funds under any circumstances? 

Mr. Renyi. The issue. Congressman, I believe, is a systemic one. 
It really lends itself to a discussion of the characteristics of the 
payment system, not necessarily what the Bank of New York or 
any other bank can or cannot do. What we are looking at is a sys- 
tem which requires a tremendous amount of volume and speed and 
automation, which, in order to ensure it takes place and it takes 
place flawlessly, there is a significant amount of automation, and 
therefore, the data that is provided in that system tends to be ab- 
breviated. Therefore, what I was recommending in my testimony is 
that the Bank of New York, as well as all of the members of the 
payment system as supported by Congress, to ensure that access 
to the system is really where the point of control exists, access to 
the system, so that we must be much, much more diligent with re- 
gard to ensuring who we do business with. 

Mr. ROYCE. Well, thank you very much for your testimony. 

Mr. Chairman, thank you. 

Chairman Leach. Well, thank you, Mr. Royce. 



176 

To continue for a moment, does the Russian Central Bank have 
an account at your bank? 

Mr. Renyi. They opened an account, Mr. Chairman, in November 
of last year. 

Chairman Leach. Nothing before then? 

Mr. Renyi. Nothing before then. 

Chairman Leach. Do you have any sense that, as you know, we 
are looking at this IMF issue in a particular timeframe, and you 
referenced it earlier. 

Mr. Renyi. Yes. 

Chairman Leach. The Central Bank might have given deposits 
to any of your correspondent banks; is that a possibility in your 
system? 

Mr. Renyi. I would suspect that it could very well be a possibil- 
ity. That is a reason why I intensely looked at the volumes going 
through those accounts for that timeframe. There was a press arti- 
cle which indicated that several days after the IMF funding, bil- 
lions of dollars flowed through the Bank of New York. To the abso- 
lute best of my knowledge and review, that did not take place. The 
numbers that I mentioned to you really were in support of that in 
the context that $640 million, I understand, was the IMF advance 
at that point in time. The moneys flowing through the account of 
$3.7 billion may or may not have gone through any of those ac- 
counts. It really would be again virtually impossible to tell. There 
is no identifier with regard to IMF or any other type of govern- 
mental moneys. 

Chairman Leach. So all you know is that a number of Russian 
banks had deposits at your bank, they had flows of funds that were 
very large, but that they weren't terrifically out of proportion, but 
they were slightly higher than the previous three months and 
slightly higher than the three months after. 

Mr. Renyi. There was a continuation of that. 

Chairman Leach. Continuation, so approximately the same 
thing? 

Mr. Renyi. Yes. 

Chairman Leach. Part of this gets a little bit — and I wonder if 
you could comment on this, to the definition of a bank. That is, we 
use the word "bank." We all have in mind a bank in our hometown, 
but it appears that increasingly Russian banks, as a few other soci- 
eties in the developing world, are individually controlled, possibly 
money laundering centers. Because something is called a bank 
doesn't necessarily mean it is a bank in our description of the term, 
and so of the banks that you have relationships with, would you 
call these traditional banks, or would you say some of them 
weren't? You had this issue of Menatep which was closed and an- 
other Russian bank that was closed, and what I am getting at is 
there any difference between the company Berlin controlled and 
each of these individual banks or some of these individual banks, 
and do you have a judgment on that? 

Mr. Renyi. Mr. Chairman, I haven't looked at every single one 
of the roughly 160 banks that we do business with today. That 
clearly is a process that is under way, however. 

In the traditional sense of a bank that I think generally the pop- 
ulation here would consider of a retail branch, retail bank, clearly 



177 

there would have to be a number of those banks that would not be 
viewed as purely Russian retail banks, but what I would more com- 
monly describe as business banks, banks that are institutional 
banks, banks that principally did business with other Russian com- 
panies acting as their commercial bank. 

Chairman Leach. Did you ever do security services for any of 
these banks? For example, it strikes me — I visualize moneys com- 
ing into your bank. I don't visualize them going out. That is, as 
they go out, do they go to other banks, do you buy securities for 
these? 

Mr. Renyi. We would be — the sources of those funds clearly 
would come from those banks' clients. Moneys — dollar funding, any 
dollar assets that those banks would have would be in our bank as 
well as other correspondent banks that those banks might have. 

The flow out of those accounts could be for the purchase of goods, 
for importation into Russia; it could be the purchase of securities. 
In that fashion it could have gone to an investment bank, a broker 
dealer, where maybe securities may have been bought. Some of 
those moneys can flow to overnight investments. 

Chairman Leach. You don't buy securities. 

Mr. Renyi. We are not a broker-dealer, no, sir. 

Chairman Leach. Do you have a sense — I mean, you are an ex- 
pert in the banking system, and there are allegations that an in- 
creasing number of banks in Russia are controlled by organized 
criminal elements. Do you have a sense for that or not? 

Mr. Renyi. I really don't, Mr. Chairman. Our diligence today, 
certainly over the past several years, not only incorporates on-site 
visitations to these banks, but also visitations to the Central Bank 
and the authorities there to get, as best we can, a line, if you will, 
as to the reputation, the local reputation, of those banks, of those 
entities. If, in fact, during the course of those conversations that 
type of conversation might have come up, clearly I would not nec- 
essarily be privy to it, but I feel comfortable that those relationship 
managers in the Eastern European area would have done some- 
thing about it and closed the accounts. 

Chairman Leach. Thank you very much. 

Does anyone else have any further questions? 

Yes, Mr. Lazio. 

Mr. Lazio. I just wanted to ask this question, because I was 
speaking to a representative of a global financial services company 
who gave me the vignette that they once had one former New York 
City police officer as their security, and now they have an entire 
division, including recruitment of former CIA and former FBI offi- 
cials. I am just wondering if that is an experience that has been 
parallel to the Bank of New York, what your security system 
looked like when you inherited the helm and what it looks like 
now, with an eye to your suggestion as to what lessons can we 
draw from this. 

Mr. Renyi. Clearly, Congressman, one of the lessons we have 
learned is to look at the staffing in those particular areas for what- 
ever talent we can get not only from law enforcement, but also 
from the regulatory and compliance area. So there is clearly an in- 
tent on our part to recruit those people that we think can be of 
great help to us with hands-on experience in precisely those areas, 



178 

and that is a difference from historical terms, where clearly we are 
looking at — for bankers, in large part, we are now looking for peo- 
ple in the infrastructure of our organization to preclude things 
from happening as they may have happened here. 

Mr. Lazio. From 1996 to 1998 when a lot of this account activity 
occurred, what was the security infrastructure at the bank? 

Mr. Renyi. We have a unit for physical security, physical and 
data security as well. 

Mr. Lazio. That is system wide? 

Mr. Renyi. Enterprisewide, enterprisewide, made up of individ- 
uals formerly from law enforcement, principally in the New York 
City metropolitan area. 

Mr. Lazio. You have since augmented that. Have you since en- 
hanced that division? 

Mr. Renyi. We have not from a physical security point of view. 
We have augmented it from a data security point of view. Our at- 
tention is certainly going to go to the physical security side as well, 
principally in terms of liaison with law enforcement on a day-to- 
day basis. 

Mr. Lazio. Obviously there is significant concern in a sort of bor- 
derless society, especially on the economics, and it becomes increas- 
ingly difficult to regulate within borders and at the same time to 
have confidence in our financial systems. It is going to require a 
good amount of proactive engagement, voluntarily, on the part of 
our Nation's best financial institutions. I hope you take leadership 
on that. 

Mr. Renyi. I certainly endorse that. 

Mr. Lazio. Thank you. 

Chairman Leach. Mr. Barr, 

Mr. Barr. Thank you, Mr. Chairman. Just one quick follow-up 
question. 

When we were talking previously about SARs, I think you indi- 
cated the bank had filed an SAR? 

Mr. Renyi. On these particular accounts, yes, we did. 

Mr. Barr. Yes. And do you have that with you? 

Mr. Renyi. I do not. 

Mr. Barr. Could you provide a copy to the Chairman, please? 

Mr. Renyi. Certainly. 

Mr. Barr. Within the next week? 

Mr. Renyi. Absolutely. 

Mr. Barr. OK, thank you. 

Chairman Leach. Well, let me just conclude with one observa- 
tion that has nothing to do with the Bank of New York, or probably 
not, but it strikes me in the world where you have many societies 
in which people in public life control — they have disproportionate 
influence in the commercial and financial system, that if one does 
a favor for someone of this nature, financial institutions can be 
benefited in other ways. Or if one does not, one can be negatively 
impacted, and there is an implicit kind of reward-punishment syn- 
drome that can occur with public officials and their accounts 
abroad. That becomes a very competitive circumstance, I would as- 
sume, as well. 

It just seems fairly obvious that if one is seeking the right to 
have a distribution channel of one kind or another in a given coun- 



179 

try, it would be helpful to have the account of the President of that 
country. This is something that is a very worrisome phenomenon, 
I would assume. I don't know if your case, you have all of five em- 
ployees in Russia, so you have not been seeking a larger presence, 
although you do have accounts in a large number of Russian banks. 

The only thing I would add to this is the magnitude of these dol- 
lars is really stunning. International currency flows are of a vol- 
ume that make even those of us who deal in Federal Government 
spending difficult to comprehend. You have currency flows that al- 
most equal on a daily basis the totality of the United States budget 
for a year, and you have flows that come in and out of banks that 
are of extraordinary proportions. But, nonetheless, when you look 
at the issues of millions and billions applying to single individuals, 
it does seem to be something that our system is going to have to 
pay attention to. 

I am struck with the likelihood that Mr. Renyi has described the 
Bank of New York as a possible poster boy, but there is a strong 
possibility that other institutions have similar kinds of accounts, 
and that this is an issue that does take serious review. And I am 
struck also with the observation of Mr. Renyi that if our country 
moves in a given direction without bringing along the international 
community, there can be difficulties, and we are all going to have 
to be looking at these issues with great care. 

But I would say that what Bank of New York has become part 
of a transmission built for is something that goes beyond the bank- 
ing matter, and when we look at the Russian issue and the future 
of Russian society, we are looking at a vital interest of the United 
States of America. So it means we are obligated to look at this as 
more than an individual institution issue, as more than a United 
States banking issue, but in the largest measure of the national in- 
terest of the United States and how it intertwines with the best in- 
terests of the Russian people. And that is why we have insisted 
that your bank appear, not out of any reason to be pointing dis- 
proportionate fingers at a particular American bank, but out of the 
symbolism that these are stunningly significant world events that 
have become centered in a financial system and then back down 
into a particular institution. 

I appreciate the difficulty of your testimony, and thank you for 
your appearance. 

Mr. Renyi. Thank you, Mr. Chairman. 

Chairman Leach. Thank you, Mr. Renyi. 

Our next witness is Ms. Anne Vitale, the Managing Director and 
Deputy General Counsel of Republic National Bank of New York. 
Ms. Vitale. 

STATEMENT OF ANNE T. VITALE, MANAGING DIRECTOR AND 
DEPUTY GENERAL COUNSEL, REPUBLIC NATIONAL BANK OF 
NEW YORK 

Ms. Vitale. Chairman Leach, Members, on behalf of Republic 
National Bank of New York, I would like to thank you for inviting 
me to appear today. As Chairman Leach said, I am Managing Di- 
rector and Deputy General Counsel of Republic, where I have been 
employed for nine years. As part of my duties at Republic, I am re- 
sponsible for the development of Republic's global anti-money laun- 



180 

dering policy. Prior to joining Republic, I served as an Assistant 
United States Attorney in the Southern District of New York, 
where I prosecuted money laundering, narcotics and organized 
crime cases. 

Republic supports the efforts you have made in discussing how 
financial institutions can protect themselves from attempts to laun- 
der money through the use of the international wire transfer pay- 
ment system. 

Republic is committed to making every effort to ensure that its 
banks around the world are not being used for illegitimate pur- 
poses. I am here to share with you the policies and procedures that 
Republic has developed in order to achieve that goal with respect 
to international wire transfer activity. 

Before a correspondent account is opened at Republic, Republic 
obtains information about the foreign bank, which is detailed in a 
seven-page questionnaire, a copy of which has been provided to the 
committee. 

The information that Republic obtains includes the names of the 
owners and managers of the bank, its asset size, the identity of the 
bank's regulatory supervisor, and a description of the procedures 
the foreign bank uses to know their customers. 

Republic began the process of designing systems to monitor activ- 
ity through its correspondent bank in late 1997. In substance. Re- 
public's system filters out certain transactions and captures pat- 
terns of transactions which meet or exceed selected thresholds. We 
then apply the combined judgment of members of the Know Your 
Customer Committee to determine whether the activity may be 
suspicious. 

Republic is proud of its initiative in developing its wire transfer 
monitoring system for correspondent banking. We believe that it is 
unmatched in the industry. As stated in a letter that Republic's 
chairman received from the FBI, Republic's wire transfer monitor- 
ing system was found to be "highly effective in detecting wire 
transfer patterns indicating possible illegal activity." 

The FBI letter is attached also. 

There are basically two t3T3es of wire transfers through cor- 
respondent bank accounts. The first type of wire transfer is a bank- 
to-bank transfer in which a foreign bank is making or receiving a 
pajonent for its own account, for example, to settle a foreign ex- 
change transaction. 

There are approximately 92,000 bank-to-bank wire transfers to- 
taling $306 billion in the average month at Republic. Republic's ex- 
amination of bank-to-bank transfers has not over the course of fif- 
teen months resulted in uncovering any significant pattern of activ- 
ity that was suggestive to us of suspicious activity. For this reason. 
Republic now excludes bank-to-bank transfers from its monitoring 
program. 

I should add that I have had conversations with Federal agencies 
asking them if they had any suggestions for our system with re- 
gard to bank-to-bank transfers, and everyone came up with the 
same answer, that they did not know how to monitor that or how 
to create a system that would detect a pattern for those transfers. 



181 

The second and more critical type of wire transfer activity is a 
third-party transaction in which the foreign bank is making or re- 
ceiving a payment for the benefit of one of its customers. 

There are approximately 58,000 third-party customer wire trans- 
fers totaling $65 billion in an average month at Republic, and Re- 
public has focused on these third-party wire transfers in its mon- 
itoring program. 

Commonly, the role of a bank in the United States is an inter- 
mediary one. There is commonly five parties to a wire transfer: an 
originator, an originating bank, an intermediary bank, a bene- 
ficiary bank, and a beneficiary. In most of the cases, Republic is an 
intermediary bank. It does not have the account of either the origi- 
nator or the beneficiary. Nonetheless, when the flow of funds be- 
tween an originator and a beneficiary is significant in terms of 
numbers and in terms of transfers, Republic seeks to capture that 
data. 

In order to produce a report that was manageable in size and 
quantity of information, Republic set thresholds for the type of ac- 
tivity that is to be captured. After trying various approaches. Re- 
public designed a system to capture the following data: A same 
originator to the same beneficiary three times a month, five times 
a month, whatever the number is — and I must say that none of 
these numbers have any special magic to them, and we vary the 
numbers from month-to-month — ^but we are looking for more than 
one, more than two, sometimes more than three transactions be- 
tween the same originator and the same beneficiary and the aggre- 
gate amount of the dollar transfer in one month being over 
$500,000. 

We also fluctuate the dollar amount. Sometimes we will go as 
low as $100,000; sometimes we will raise it higher. We are still Ad- 
dling with the system, and what we have found and what we are 
concerned about is what I testified to here today, is not a blueprint 
for individuals who want to circumvent a system. So we use vary- 
ing dollar amounts as well as various figures to what constitutes 
a pattern. But we are focusing on patterns. 

Other type of pattern we focus on is the same originator to ten 
or more or sometimes less than ten beneficiaries or vice versa, dif- 
ferent originators to the same beneficiary, with a substantial dollar 
amount that is somewhere in the neighborhood of $500,000. 

Indeed, Republic, as I said, varies the amounts as it continues 
to monitor, and sometimes we will look at an account and put abso- 
lutely no thresholds in whatsoever. 

Once a pattern is identified, Republic checks databases to see if 
there is any information about the originator or beneficiary that 
would support the legitimacy of the amounts and the pattern of the 
wire transfer. For instance, if Republic discovered information that 
established that an originator was a publicly traded company hav- 
ing business activities consistent with the amounts and geography 
of the transfer, Republic would document this information and take 
no further action. 

We access Lexis-Nexis, we access the Web to try and find out in- 
formation about the originator and the beneficiary that appears on 
wire transfers since neither of these entities are Republic's own 
customers. If Republic has not been able to discover anything about 



182 

the originator or beneficiary that does have a significant pattern 
that would justify the activity and the volume, Republic contacts 
the originator or beneficiary bank who is our customer and inquires 
about the purpose of the transfer. 

This has been a process of educating our correspondent banks 
that we need to know information as to the purpose of the transfer 
that would make us comfortable with the wire transfer. 

I want to stress the decision of the Know Your Customer Com- 
mittee, which I am the chairperson of, is by no means infallible, 
but it is our best efforts that we are putting forward to make a de- 
termination based on the information that we are receiving either 
as a result of public databases or information from our correspond- 
ent banks. 

In August of 1998, the programming generated a monthly report 
for wire transfer activity through our correspondent banks, and 
that particular activity took place in the month of July of 1998. 
This report identified the accounts of Republic correspondent banks 
which had patterns of activity and met the thresholds similar to 
the ones that I described. 

In August of 1998, as a result of its wire transfer monitoring, 
and this was the first full month of transfers that we had received 
from the new system, Republic discovered that substantial amounts 
of funds were being transferred from one particular originator to 
four beneficiaries. From the information supplied in the wire trans- 
fer message, it appeared that the originator was a corporation 
which had an account at a Russian bank. The Russian bank had 
an account at Republic, and the four beneficiaries had accounts at 
three other United States banks located in New York City. One of 
the four beneficiaries was Benex, which had an account at Bank of 
New York. In one month the total amount of wire transfers from 
the common originator to the four beneficiaries was approximately 
$22 miUion. 

Republic was unable to determine any particulars about the one 
originator and the four beneficiaries other than that information on 
the wire transfers indicated that one beneficiary, Benex, was lo- 
cated in Queens. After sending an investigator to this address, Re- 
public was unable to confirm that Benex was, in fact, located there. 
Republic informed the FBI and other appropriate authorities about 
the wire transfer activity that I have described, and we made that 
notification both telephonically with the FBI and FinCEN and in 
writing by filing an SAR. 

Since August 1998, Republic has continued to monitor for pat- 
terns of significant activity that may be suspicious. It has reviewed 
the patterns that are identified by its systems and documents its 
determinations resulting from its reviews. If Republic is able to ob- 
tain information that seems to justify the wire transfer activity, it 
takes no action. If Republic is not able to obtain such information, 
it reports the transactions to the appropriate authorities. 

In some instances. Republic will cease processing transactions 
that appear suspicious by informing the correspondent bank that 
it will no longer process such transactions. At other times Republic 
has ceased processing transactions with certain offshore havens. In 
yet other instances. Republic has terminated its relationship with 
specific correspondent banks. 



183 

The decisions, as I said, of the Know Your Customer Committee 
are by no means infaUible. They are based, as I said, on the results 
of the committee's best efforts to detect, report and prevent pro- 
ceeds from suspicious activities from passing through our banks. 

We report, I report, to a public responsibility committee of the 
board of directors, and in addition to reporting to our general coun- 
sel, to the chairman of the board. The public responsibility commit- 
tee has taken an active role in reviewing Republic's wire transfer 
monitoring system and its relationships with its correspondent 
banks. That committee is chaired by William Rogers, former Attor- 
ney General and Secretary of State for the United States. 

In addition to the procedures in effect in the correspondent bank- 
ing department, Republic has policies and procedures in effect in 
each area of business. We have a written global corporate Know 
Your Customer policy, which was codified in 1992, and which has 
been updated regularly since that time, and that provides the basic 
framework for our anti-money laundering efforts. I have submitted 
that also to this committee. 

I hope that I have conveyed to you the importance that Republic 
places on its anti-money laundering efforts. In the course of my 
nine years at Republic, senior management has been committed to 
prevent the use of its banks as a vehicle to launder the proceeds 
of illegal activity. 

The Chairman Mr. Schlein and his predecessor Mr. Weiner, have 
been staunch supporters of implementing the Know Your Customer 
policy in all departments in all locations. Indeed, their commitment 
reflects the views of Republic's principal shareholder, Mr. Edmond 
Safra, who has repeatedly encouraged our efforts and stressed the 
need for ongoing training in this area. 

Two years ago, at his initiative, Republic convened a two-day 
anti-money laundering seminar in which we called in outside ex- 
perts, former Government officials from the United States, and a 
former magistrate from Luxemburg, a former serious frauds pros- 
ecutor from the United Kingdom, and we brought in 170 of our sen- 
ior private banking officers from all Republic locations. Annually 
we hold training classes for all our officers in all our locations. Ad- 
herence to Know Your Customer policy and anti-money laundering 
programs and procedures is audited, and adherence to these poli- 
cies is a condition of employment. 

Finally, Republic has a policy of cooperating fully with our regu- 
lators, and I should say the OCC, which regulates Republic, has 
been kept abreast and has encouraged our efforts in wire transfer 
monitoring, and they have looked at both our correspondent bank- 
ing before this system was in place as well as after. 

We also cooperate with law enforcement, and I hope, as you can 
judge by my presence here today, with Congress. 

Thank you. 

[The prepared statement of Anne T. Vitale can be found on page 
405 in the appendix.] 

Chairman Leach. Thank you, Ms. Vitale. 

Let me just begin by asking, as you may know, several of us in- 
troduced legislation yesterday that would require banks opening or 
maintaining accounts for foreign entities to identify and maintain 



184 

a record of the identity of each person having a beneficial owner- 
ship in the account. 

Does this seem Uke a reasonable approach? Would it involve cost- 
ly new efforts on your behalf, or do you do something rather simi- 
lar today? 

Ms. VlTALE. We do that now. 

Chairman Leach. Does this appear to you to be common sense? 

Ms. VlTALE. Yes. 

Chairman Leach. It is my understanding that many banks do 
this, but some don't, and it seems like it is a fairly reasonable thing 
to require as a universal requirement. You are suggesting that that 
does make sense? 

Ms. VlTALE. I agree with that. 

Chairman Leach. Second, you have correspondent banks. Do you 
have many in Russia? 

Ms. VlTALE. Yes, we do. 

Chairman Leach. How many? 

Ms. VlTALE. About 150. 

Chairman Leach. How do you look at these banks? Are they 
good banks? Are these accounts or banks? These are banks? 

Ms. VlTALE. These are banks, and we have about 150 accounts 
of those banks. 

Chairman Leach. How do you monitor those? 

Ms. VlTALE. Well, first thing, if you look at the seven-page pro- 
file, that profile is a Know Your Customer profile. We get detailed 
information on each bank. As I said, what we do before we open 
it, and for Russia, I have to sign off on them. The business man- 
ager, the head of the Russia and NIS region, has to sign off on it, 
and for Russia NIS I have to sign off on it. 

Once again, I am not infallible, and neither is our banker or any 
institution, but we have a process in place that I think shows that 
we are being duly diligent about knowing who these banks are. We 
visit them every year, and we monitor the activity through our 
bank, and that is what is new. 

We started to monitor since — ^well, we tried monitoring starting 
in late 1997, but until we developed a program that we have, the 
reports of this activity were too voluminous to monitor. So we had 
to form a system that would identify suspicious activity in terms 
of volumes and in terms of patterns, and that is what we look on, 
and we look at it on a montMy basis. 

We have meetings once a week to review the activity in our cor- 
respondent banks. Every month my department gets a report. We 
give the report of the activity that filters out the non-patterns and 
the bank-to-bank activity, and we review those, and we have week- 
ly meetings that go on sometimes for two or three hours each week 
to review the activity. The correspondent banking department has 
its own compliance officer, who then is in charge of getting infor- 
mation about some of the patterns that we see, talking to our cor- 
respondent banks if she is unable to get information, and reporting 
back that information to the committee. 

Chairman Leach. A previous witness indicated that they had 
given a hard review in a given period of time regarding a particu- 
lar IMF loan. Have you looked at this period of time? Is there any- 
thing unusual about it to you? 



185 

Ms. VlTALE. Yes. We have not seen IMF transfers of any signifi- 
cant amount at all going through. One of the things with our wire 
transfer report is to search for names appearing in the press. Now 
I have a staff member who puts in the names appearing in the 
press to see whether the wire has gone through Republic with that 
name on it. We have not seen substantial IMF transfers. What we 
have seen is very, very minimal. 

Chairman Leach. What do you define as an IMF transfer? 

Ms. VlTALE. We ran just recently the International Monetary 
Fund, and they were a party maybe on 3,000 transfers. 

Chairman Leach. It has their name attached to it? 

Ms. VlTALE. Yes. 

Chairman Leach. OK. 

Mr. LaFalce. 

Mr. LaFalce. Thank you, Mr. Chairman. 

Ms. Vitale, you gave a very impressive presentation, and it would 
appear that Republic is doing, based on your testimony in any 
event, quite an excellent job. 

Let me ask you this: You are regulated by the OCC. 

Ms. VlTALE. Yes. 

Mr. LaFalce. The Bank of New York is regulated by the Federal 
Reserve. 

Do you believe there is much of a difference in the regulation, 
the oversight and guidance with respect to enforcement of our 
money laundering laws? 

Ms. VlTALE. Most of my contact has been with the OCC. We have 
a resident examiner. The OCC has a policy of having resident ex- 
aminers in the large commercial banks, and they have been very 
proactive. Our resident examiner, I know, is a member of the 
OCC's national money laundering group. I have worked very close- 
ly with him. 

Since we are also regulated by the Fed, because we are a bank 
holding company, we also have Fed examiners come in to review 
the holding company and the non-bank subsidiaries. I have not 
interacted directly with those examiners, but I know Rick Small, 
and I know the Fed has had a very conscientious approach to 
money laundering as well, but I am just not as familiar with them. 

Mr. LaFalce. Nor am I, but this is certainly something that I 
am sure our committee will be pursuing. We want to make sure 
there is rigorous enforcement through regulation and oversight and 
investigation. 

Ms. Vitale. The OCC has been rigorous. 

Mr. LaFalce. That is what I have heard. That is what I have 
heard. 

Now, tell me this. You seem to have some excellent systems in 
place. Did you devise those, or did the OCC give guidance that sys- 
tems should be devised and we recommend the following at all? 

What other banks have systems somewhat similar to yours that 
you are aware of? Were you here also for my questioning of Mr. 
Renyi? 

Ms. Vitale. Yes, I was. 

Mr. LaFalce. Then I would reiterate some of those questions I 
asked him to you, too, to refresh your recollection. Are there any 
groups of banks that get together to discuss money laundering and 



186 

ways in which they can combat money laundering activities? Is 
there a section of the American Bar Association and their banking 
law experts, a special subsection on money laundering that comes 
up with this? Does the OCC or Federal Reserve or superintendent 
of banks of New York have seminars saying to banks, you know, 
look at three reports per day in excess of $500,000 with the same 
name; 10 reports if they have different names in excess, and so 
forth, and so forth? 

What is going on out there, and what should go on out there? 

Ms. ViTALE. The OCC knows about our system, and when I said 
about trying to develop the criteria that I wanted to see the results 
of, I checked with our resident examiner, and one of the things that 
was suggested was a variance report, track each bank's volume 
month to month, and when you see a variance, that will show you 
something. That is a very valid tool when you are looking at indi- 
vidual accounts of individuals or even of corporations. 

We tried it. It did not work. The nature of correspondent banking 
is just so broad that there are so many variables for activity. We 
had a pattern, and we were looking at any variation over 35 per- 
cent. It did not work. 

Mr. LaFalce. Because of the time constraints, about how many 
Suspicious Activity Reports would you file in a year? 

Ms. ViTALE. On correspondent banking? We have done 25 since 
we put this program in place. 

Mr. LaFalce. Which is how long a period of time? 

Ms. ViTALE. Since August of 1998. And these are significant. 

Mr. LaFalce. OK. Now, do you know what is happening, how ef- 
ficacious is this? What has happened to those? 

Ms. ViTALE. That is why you are having the hearings. 

Mr. LaFalce. We have this one hearing, OK. You were filing 
Suspicious Activity Reports before August of 1998. 

Ms. ViTALE. Definitely. But on correspondent banking, as a re- 
sult of our wire transfer monitoring, it was August of 1998 that 
started it. But yes, we were filing, and we file regularly when we 
see violations. But most of those times it is in an account that is 
a Republic customer directly. Through correspondent banking, the 
originator or the beneficiary is not an account at Republic in most 
cases. 

But do you want me to answer your question? 

Mr. LaFalce. Surely. 

Ms. ViTALE. There are working groups. The Department of 
Treasury does have a bank working group that gets together and 
talks about issues regarding the Bank Secrecy Act. The clearing- 
house in New York has working groups. Republic is a member, 
along with other banks, in other working groups of compliance offi- 
cers, so there are meetings and discussions. 

Mr. LaFalce. Let me just ask you this. I remember meeting with 
a group of physicians once, and it was a rather long lunch. We dis- 
cussed many issues. All of a sudden they forgot I was there and 
started talking about themselves. All of a sudden you heard about 
this malpractice case and that malpractice case went on. 

When you get together at these group meetings, do you become 
aware that maybe certain banks are not doing what they should be 



187 

doing in order to detect violations of our anti-money laundering 
laws? 

Ms. ViTALE. I think different banks have different commitments 
to it. 

Mr. LaFalce. Is there a reason why one would have a lesser 
commitment to it? Could it be profitable to have a lesser commit- 
ment to it? 

Ms. VlTALE. Well, I know the system we put in costs money. It 
probably costs $500,000, and maybe even upward of that. You need 
to have senior management sign off on a system like that. 

Mr. LaFalce. All right. That is half-a-million dollars in the total 
scheme of things, but could there be some enhanced business op- 
portunities because of a laxer approach to enforcement? 

Ms. VlTALE. I am sure there is a range of responses and a range 
of reasons for it. 

Mr. LaFalce. OK. I am searching for it. If you could ever help 
me with that. 

If I can just have one last question. When the IMF is going to 
give assistance to any country in the world, we are aware of the 
privatizations that take place, too, and the huge amounts of money 
that are transferred at such periods of time. 

Is there any mechanism for enhanced oversight and surveillance 
of, say, privatization transactions and the flow of money from such 
transactions? 

Ms. VlTALE. When we look at the correspondent banking activity, 
we don't know what is the reason behind the transaction. We know 
a beneficiary, we know an originator, we know an originating bank, 
and we know a beneficiary bank. We can go and look at databases 
and see what we will learn about either the originator or bene- 
ficiary who we don't know. If there are articles, if there is a busi- 
ness news article about someone being privatized, then we learn 
about it. But there is no way of capturing that until you go behind 
the wire transfer. 

You have to first know which wire transfers to look at, and be- 
cause there are so many of them, the only way you could do that 
is if you capture patterns, in my opinion. Once you capture a pat- 
tern, you have to then find the answer or some information about 
who the ultimate beneficiary and originator is. 

Mr. LaFalce. Thank you. 

Chairman Leach. Ms. Vitale, we have votes on the floor, so what 
I would like to do is recess pending the vote. The hearing is re- 
cessed pending the two votes. 

[Recess.] 

Chairman Leach. The hearing will reconvene. It has been a long 
day, but I have just several more questions. There is much interest 
in the issue of profitability and so you take the correspondent rela- 
tions, 150 banks. We have a correspondent relationship say with 
Russia and others around the world. How profitable is one of those 
relationships per bank? I mean is it a million dollars a year? 

Ms. Vitale. Per bank? 

Chairman Leach. Yes. Is it less? 

Ms. Vitale. I am not the right person to talk to in terms of num- 
bers and profitability. That is one area that I don't have to worry 



188 

about. But no decision is made by Republic in this area on the 
basis of profitabihty. It is nowhere near a milUon a bank, I know 
that. Most of what I have seen has been maybe $5,000 a year per 
bank, some banks may be $20,000. 

Chairman Leach. As you may recall, there is a recent article in 
the New Yorker Magazine, actually, several years ago, a journalist 
by the name of Albert Friedman, he described your bank's role as 
shipments of dollars to Russia, and the article contained allega- 
tions that a large share of these funds were funded through imper- 
fect Russian banks used to finance activities in perfect Russia insti- 
tutions. 

Are you familiar with this article? Does it carry legitimacy? 

Ms. ViTALE. Mr. Chairman, that was in January of 1996. In Feb- 
ruary of 1996, New Yorker Magazine issued a two-page response, 
it contained six letters from the Department of Justice, from the 
Manhattan DA's office, from the OCC, from New York State bank- 
ing, FinCEN, and I forget the sixth one. At that time Congressman 
Schumer had them placed in the Congressional Record, so they are 
a matter of public record. Each of the agencies said that they were 
not only aware of the bank note shipments that were made public, 
but that there was nothing illegal about them, and that the infor- 
mation in that article was not accurate. When this article was re- 
printed in Paris, Republic sued and obtained a judgment for defa- 
mation on that article. 

Chairman Leach. So you are suggesting that sometimes the 
press does not get the story right? 

Ms. ViTALE. Yes. 

Chairman Leach. Paris has some very interesting defamation 
laws. Anyone in the public life somehow identifies with the judg- 
ments against journalists. Anyway, it has been publicly reported 
that your bank was responsible for the initial reports suggesting 
that there was an account that involved the Bank of New York that 
should be looked at; is that valid? 

Ms. ViTALE. Well, we filed an SAR and before checking whether 
I could say that, I ran it by the Department of Justice in New York 
and the FBI, because as you know, there is a criminal sanction 
against divulging whether you filed an SAR. But they said, yes, it 
was already on the record, on the public record. 

Republic filed, as I mentioned in my testimony, because it saw 
one originator sending, I think it was over $20 million in one 
month to four beneficiaries, one of which was Benex, and we could 
not find anything on the public record about Benex that would jus- 
tify that sum of money or about any of the others in the wire trans- 
fers that we reviewed. 

Chairman Leach. I appreciate that. And it certainly appears in 
this case that your bank's diligence in this matter has been rel- 
evant. I think it shows the import of these SARs in certain cir- 
cumstances. 

Well, thank you. I have no further questions. 

Ms. ViTALE. Mr. Chairman, I read your bill. If I may, there is — 
in the provisions you make an exemption for foreign entities for dif- 
ferent jurisdictions, and I just want you to be aware of what I am 
saying, some offshore banks being incorporated in one of the areas 



189 

that you have as an exemption, and that is the Republic of Palau, 
so I would suggest you may want to look at that. 

Chairman Leach. Well, thank you. I believe it is very construc- 
tive advice. And I might ask that you feel free to write us a more 
defined piece as well, if you have on this bill. We are certainly ap- 
preciative of that. In this matter, your bank is clearly to be com- 
mended. 
. Ms. VlTALE. Thank you. 

Chairman Leach. Thank you very much. 

Our last witness today is Karen von Gerhke-Thompson of the 
First Columbia Company, Inc. 

And, Ms. Thompson, we welcome you, and please proceed. 

STATEMENT OF KARON von GERHKE-THOMPSON, VICE 
PRESIDENT, FIRST COLUMBIA COMPANY, INC. 

Ms. VON Gerhke-Thompson. Thank you, sir. Mr. Chairman, 
please kindly permit me to express how extraordinarily grateful I 
am for the opportunity to appear before you today. This is a 
unique, first time experience for me. I have not had the privilege 
of appearing before a committee of the United States Congress, so 
I thank the Chairman for this opportunity. 

The gravity of the significance of this hearing, an inquiry into 
Russian money laundering operations that may have tainted — or 
may have been tainted by, contingent upon one's perspective — U.S. 
banking and international financial institutions, cannot be suffi- 
ciently underscored. The past five years of my life have been con- 
sumed with who knew what when, relative to how all-persuasive 
and how high corruption reached in Russia and its former satellite 
republics, and why who knew what when was not reported to ap- 
propriate legislative and judicial oversight committees. 

I have been asked to give a brief summary of my background. I 
am by profession a stockowner and Vice President of First Colum- 
bia Company, Inc., a company established in the District of Colum- 
bia in 1954. The First Columbia Company provides consultant 
services in international marketing, strategic alliance formation 
and government affairs to a host of U.S. Fortune 500 companies, 
primarily in the defense industry, energy and environmental serv- 
ices sector. Our clients in the defense industry sector include ITT 
Defense International/ITT Gilfillan, the former Westinghouse Elec- 
tronics Systems Group International, Boeing/Argo Electronic Sys- 
tems Group, Raytheon Corporation, and AT&T Ocean Systems. 
Other clients include, among others, Morrison-Knudsen Inter- 
national, Westinghouse Environmental Services Technology Divi- 
sions, Chemfix Technologies, Inc., National Environmental Control, 
Separation and Recovery Systems, Coastal Oil Corporation and 
Frank E. Basil, Inc. 

Concurrently, I was a business partner of the late U.S. Attorney 
John M. Mitchell, Chairman of Global Research International, and 
a principal in the firm of Murphy and Associates, Inc., founded by 
Admiral Daniel J. Murphy, U.S. Navy Retired and former Chief of 
Staff to then-Vice President Bush. 

My first fifteen years in Washington representing some of Ameri- 
ca's finest corporate good citizens was both promising and lucra- 
tive. To borrow my much often-used quote from Sir Winston 



190 

Churchill: "Washington is ever the city at your feet, or at your 
throat." I think most of us who have lived in Washington have ex- 
perienced this at one time or another, at least most of the people 
I know have experienced it at one point. 

Since my involvement with the Central Intelligence Agency and 
my efforts to bring the issues of Russian money laundering oper- 
ations to the attention of appropriate oversight committees, Wash- 
ington has been ever a city at my throat. And my career has been 
dormant. 

Admiral Murphy warned me "never volunteer"; how sorely I re- 
gret that I did not heed his advice. In April of 1993, I volunteered 
my services as an unpaid intelligence asset to the CIA on a CIA 
operation to penetrate what the CIA, FBI and Department of Jus- 
tice knew was a KGB money laundering operation that had tenta- 
cles that reached into the Kremlin to Boris Yeltsin. The target of 
the operation was Alexandre Konanykhine, the U.S. Vice President 
of Menatep Bank and President of Greatis USA, a public relations 
and advertising firm that he alleged represented Menatep Bank, 
the European Union Bank and Greatis Russia, among others. 

Konanykhine alleged that he controlled $1.7 billion in assets held 
by Menatep Bank, that he wanted to move out of Russia and East- 
ern European countries into the U.S., Latin America and the Car- 
ibbean. He alleged that Menatep Bank wanted to establish an off- 
shore bank in Latin America and/or the Caribbean to protect its cli- 
ents' assets and investment portfolios and to establish a bank with 
an initial capitalization of $1 billion U.S. dollars, to obtain 100 nat- 
uralized passports for preferred clients of Menatep who allegedly 
held individual assets and investment and portfolios of $100 mil- 
lion, 25 passports for employees of Menatep Bank and 15 diplo- 
matic passports for very, very special clients of Menatep Bank at 
any cost. 

This project was brought to me by Carter Cornick, Eugene 
Propper and Jonathan Ginsberg of the Washington, DC. based law 
firm of Ginsberg, Feldman and Bress. Cornick, Propper and 
Ginsberg wanted my help in assisting them in accessing officials 
who could facilitate a favorable negotiation climate for the estab- 
lishment of a bank and expedite the procurement of the passports. 

The $1.7 billion Konanykhine wanted to move out of Russia 
raised a red flag with me, no pun intended. Russia was in the early 
phase of its transition from a command economy to a free market 
economy. We had a pending $4 billion appropriation bill to provide 
financial aid to Russia to assist them in their transition. 

I telephoned a contact I had at the CIA who served as the direc- 
tor of the Soviet Eastern division. His telephone call was returned 
to me by a Mr. Z — and I am identifying these individuals by the 
initial of their last name to protect their identities — who informed 
me that the CIA was extremely interested in obtaining intelligence 
on and monitoring the activities of Konanykhine and 
Khodorkovsky, President of Menatep Bank. 

Mr. Z informed me that I would be contacted by a Mr. V. On the 
same day, I received a telephone call from Mr. V. He informed me 
that the CIA believed that they were engaged in an elaborate 
money laundering scheme to launder billions of dollars stolen by 
members of the KGB and high-level government officials. 



191 

The operation was abruptly ended in September of 1993 when 
Konanykhine telephoned his Washington associate Elena 
Cidorchuk-Heinz-Volevok from Turkey to instruct her to terminate 
the contract with First Columbia Company, Inc., and to cut off all 
further communications with us. She cited Konanykhine's decision 
to terminate the contract was based on his belief that I was a 
phoney. 

In April of 1994, I was advised by two CIA intelligence officers 
that the operation had been compromised by convicted spy Aldrich 
Ames. Mr. V corroborated that I had been compromised on the op- 
eration. He personally had routed the traffic on the operation to 
Ames who was responsible for monitoring money laundering oper- 
ations at the CNC — the CIA's Counter Narcotics Center. An FBI 
report submitted to the Senate Select Committee on Intelligence 
confirmed that Ames and Konanykhine were in Turkey in Septem- 
ber of 1993 at the same time, in the same location, and at the pre- 
cise time that Konanykhine telephoned his assistant from Turkey 
to terminate the contract with First Columbia Company, Inc. 

A Senate Select Committee report on the damage assessment of 
Ames' espionage activities also confirms that Ames was in Turkey 
in September of 1993, where he attended an international counter- 
narcotics convention and where, according to a Statement of Fact, 
he turned over to the KGB classified cables and documents he had 
downloaded from the CIA's mainframe computer onto his personal 
laptop computer. 

This operation was not reported to Congressional Oversight Com- 
mittees as mandated under the National Security Act of 1947. 
When it was not reported, it signaled me that it was a "policy" ver- 
sus an "intelligence" failure, as is so often the case when senior ex- 
ecutives fail to report significant failed intelligence or law enforce- 
ment operations. 

From my first date of contact with the Agency in April of 1993 
through September of 1993, I worked with Mr. V or a daily basis. 
It was evident to me, as would later be confirmed by Mr. Z, that 
the CIA knew who Konanykhine and Khodorkovsky were and 
where their money laundering trail led. 

Konanykhine was a known KGB asset running a KGB money 
laundering operation with stolen funds that were passed through 
Khodorkovsky of Menatep Bank as a KGB-controlled front firm. 

Konanykhine is on the top of Russia's most wanted list. He is 
INS' highest profile case and the FBI's biggest quid pro quo with 
the Russian Military Procuratura. Konanykhine was a KGB asset 
conducting a KGB money laundering operation out of the Willard 
Hotel in downtown Washington, DC. The money was being 
laundered through Menatep Bank that is also alleged to be KGB- 
owned and controlled, as is Menatep's wholly-owned subsidiary, 
Yukos Oil. Khodorkovsky of Menatep Bank is the subject of the in- 
vestigation into the Bank of New York's involvement in facilitating 
the laundering of an estimated $10 billion, although I understand 
those estimates range between $10 billion and $7.2 million. Some 
of the $10 billion is believed to be money loaned to Russia by the 
IMF. 

Khodorkovsky and Konanykhine were also the subject of an in- 
vestigation by the Federal Reserve Board of Governors for their in- 



192 

volvement in establishment of the European Union Bank in Anti- 
gua, one of eight Russian banks in Antigua alleged to have been 
established for money laundering purposes. 

Here is a man who conducted not one, but two money laundering 
operations out of the Willard Hotel directly across the street from 
the Office of the President of the United States: the KGB money 
laundering operation, and the European Union Bank, both of which 
were undertaken by Konanykhine on behalf of Khodorkovsky of 
Menatep Bank. The CIA, FBI, and the Department of Justice were 
knowledgeable of the KGB operation and the Federal Reserve 
Board was knowledgeable of the European Union Bank. Surely all 
were knowledgeable of Khodorkovsky's involvement with the Bank 
of New York. 

Here is a man who first came to the United States as a member 
of Yeltsin's first official meeting with President Bush, a man who 
alleges he financed 50 percent of Yeltsin's presidential campaign, 
who Yeltsin then rewarded with a dacha previously owned by Mi- 
khail Gorbachev, and who Yeltsin allegedly authorized his then- 
Chief of Security, General Korzackov, who I understand at the time 
was a colonel, to assign a Kremlin security deal for Konanykhine's 
personal safety and protection. Here is a man who was conducting 
a KGB money laundering operation with tentacles that reached to 
Boris Yeltsin that was penetrated by the CIA, the President's for- 
eign intelligence operational arm, that was compromised by Aldrich 
Ames, and no one told the Administration and no one reported it 
to appropriate Congressional Oversight Committees. 

I cannot remember the author, but I do remember reading a 
quote cited by an author who is quoted by a senior State Depart- 
ment official commenting half in jest: "There are no policy failures; 
there are only intelligence failures and policy successes." There is 
no jest here. The operation was a foreign policy failure, a see-no- 
evil-at-any-cost, don't-fail-under-my-watch foreign policy of ap- 
peasement, that in no small measure helped fuel the collapse of 
free market reforms in Russia. 

Russia was hemorrhaging dollars at estimates as high as $2.5 
billion per month. The Yeltsin Administration and his new 
oligarchs were bleeding the economy to near death. No tourniquet 
was offered to stop the hemorrhaging. To the contrary, the Clinton 
Administration was pouring billions upon billions of dollars into 
Russia that only fueled the hemorrhaging. We knew it in 1993. We 
may have known it earlier. 

We watched it. We did nothing to stop it. We aided it and abet- 
ted the corruption by fueling it with billions and billions of dollars 
in foreign aid and international monetary loans. I am not a lawyer, 
nor do I want to be one or, for that matter, be near one. I have 
had my fill of attorneys. But, I would venture to guess that to 
knowingly aid and abet corruption may be tantamount to being a 
co-conspirator. 

Exposing the failure of the operation would have undoubtedly 
proved to have been politically unpalatable to both the Yeltsin and 
Clinton Administrations and to the Central Intelligence Agency. 

I understand my time is up, Mr. Chairman. And I thank you. 

[The prepared statement of Karon von G^rhke-Thompson can be 
found on page 451 in the appendix.] 



193 

Chairman Leach. Well, thank you very much. 

Ms. VON Gerhke-Thompson. You are the only one left to ask 
questions, sir. 

Chairman Leach. Let me just thank you for your testimony. You 
have gone through a very unique thing in your life, and it is some- 
thing that the committee respects. It is always difficult to piece to- 
gether circumstances from one individual's story. In fact, I am re- 
minded of a novel of, oh, 30- or 40-years standing, called "The Alex- 
ander Quartet," which is the same story told four different times 
from four different persons' perspectives, and the kind of perspec- 
tive you bring is important, because it indicates a perspective of an 
American citizen not involved in a process, getting caught up in 
something of some interest. 

And I thank you very much for presenting it to the committee. 
I have no questions. 

Ms. VON Gerhke-Thompson. Thank you, sir. 

Chairman Leach. Thank you. The hearing is adjourned. 

[Whereupon, at 5:00 p.m., the hearing was adjourned.] 



APPENDIX 



July 21, 1999 



(195) 



196 




CURRENCY 

Committee on Banking 
and Financial Services 



James A. Leach, Chairman 



For Immediate Release: 
Tuesday, September 21, 1999 



Contact: David Runkel or Andrew Parmentier 
(202) 226-0471 



Opening Statement 

Of Representative James A. Leach 

Chairman, Committee on Banking and Financial Services 

Hearing on Russian Money Laundering 

The Committee meets today for its fifth hearing on international financial issues this year and the 
third on Russia and corruption over the last twelve months. The hearinp today and tomorrow will 
be followed this fall by others dealing specifically with western financial assistance strategy, 
including the International Monetary Fund (IMF), regulatory issues attendant to preventing 
financial crimes, the depth of the crime and corruption problem in Russia, Russian use of off-shore 
financial institutions and the intertwining of those institutions with US and other Western banks, 
the role of public and private US advisors in Russia's transition to free markets, the role of the US 
intelligence community in monitoring Russia's Central Bank and other monetary and banking 
matters, as well as other concerns. 

Today we will begin with an examination of recent allegations that corrupt Russian groups and 
individuals have infiltrated Western financial institutions. 

In this regard, we invited several witnesses who, according to various reports, have material 
knowledge of these matters, but who have declined to appear voluntarily before the Committee, 
including: Natasha Kagalovsky, former head of the Eastern European Division, Bank of New York; 
Lucy Edwards, formerly with the London office of the Bank of New York; Bruce Rappaport, 
Chairman and CEO of Bank of New York Inter-Maritime; Mikhail Khodorkovsky, Russian oil 
industry executive; as well as the Chairmen of several Western money center banks. 

As the hearing process continues it will be my intention to seek witness subpoenas, where 
appropriate. 

We also invited Caria del Ponte, the former chief Swiss prosecutor. She could not come because she 
took up new functions at the Hague yesterday, but she sent us a fulsome statement outlining a new 
aggressive Swiss policy toward the scourge of money laundering which involves a hard look at 
Russian corruption. I invite the Committee's attention to her statement 



iioi) ::f--047i 



HOD ::(i-(>Ot: 



197 



I also invite the Committee's attention to a letter from tlie Honorable Yuri Skuratov, the Prosecutor 
General of Russia who also was invited to testify. Mr. Skuratov notes that he is "unfortunately" 
unable to come this week, but observes that he is "deeply convinced that the forthcoming hearings 
will allow to develop valuable recommendations to the financial and law enforcement structure of 
Russia and USA in counteracting to infiltration of dirty money into our financial systems." 

Mr. Skuratov has offered his personal cooperation with the Committee's work. Significantly, 
three days after receiving the Committee's invitation his apartment in Moscow was ransacked. 

It is my intention that the first of our subsequent Committee hearings on Russia will focus on 
Western assistance strategy for Russia and the possible diversion or misappropriation of those 
funds. Last month, Mr. LaFalcc and I commissioned a GAO study to examine the effectiveness of 
the S90 billion in Western assistance for Russia, particularly in light of problems of corruption and 
the power of the so-called oligarchs. But recent developments warrant an additional in-depth 
investigation of allegations of diversion or misuse of Western assistance. 

In this contest, I would advise in the strongest possible terms that the Department of the Treasury 
insist on a full and complete audit of the relationship between the Central Bank of Russia and the 
IMF, particularly the activities of the CBR in the foreign exchange and treasury markets in the 
period July-August 1998. Failure to do so would undercut any remaining credibility of 
international financial institutions dealing with Russia. Likewise, I will request this week a full 
GAO audit of US bilateral assistance to Russia, as well as a review of multi-lateral assistance 
efforts. 

The global payment system is opaque and anonymous by design, and has been made more so by the 
technological advances of the past decade. The same technology that has produced such great 
benefits for the financial services industry and the world economy as a whole has also made it 
enormously difficult to trace the proceeds of illegal activity once a criminal succeeds in gaining 
entry to the payment system. In an era where funds can be transferred among multiple accounts on 
multiple continents in the blink of an eye, the challenges faced by law enforcement agencies, 
regulators, and financial institutions in trying to track dirty money through the system are 
enormous. 

In this regard, one of the issues brought forth by the recent reports of large money flows of 
questionable origin through western financial institutions is the legal obligation of US banks to 
report such activity to appropriate authorities. Under current law, depository institutions are 
required to file so-called "Suspicious Activity Reports" (SAR's) with the Treasury Department 
whenever they become aware of suspicious account activity or possible violations of law. According 
to press reports, it was the filing of a SAR by one of the banks that will be represented at these 
hearings, Republic National Bank of New York, that helped alert law enforcement authorities to the 
massive funds flows from Russia into other New York money center banks. 

During debate on the financial modernization legislation that passed the House earlier this year, an 
amendment was offered that would have effectively eliminated the Suspicious Activity Reporting 
requirement. Several members of this Committee, including the Ranking Minority Member and 
Rep. McCoUum, joined me in opposing the amendment, and it was defeated on a strong bipartisan 
vote. I believe that the decisive defeat of that amendment reflected a general consensus in the 
House of Representatives that banks must continue to be our first line of defense against criminal 
enterprises seeking to launder their illicit proceeds by entering them into the legitimate financial 
system. 



198 



By the same token, in our zeal to shut off the dirty money that flows all too freely through our 
financial institutions, we must be careful not to offend the legitimate privacy concerns that 
Americans have when it comes to their financial affairs. There is a difference between reviewing 
modest deposits American citizens place in depository institutions and multi-million dollar 
transactions of unknown foreign nationals from countries where the rule of law is not well 
established. The big picture is that law enforcement attention must be directed to activities of a 
growing new international criminal class, not traditional American small business enterprises. 

As recent events demonstrate, where large money-center banks accept sizable deposits and wire 
transfers from overseas, particularly where those transactions originate in countries with minimal 
regulatory controls or high levels of private or public corruption, it is critically important that 
banks exercise due diligence in knowing who their customers are and whether their transactions are 
legitimate. To do otherwise risks making the western fmancial system complicit in the endemic 
corruption that has victimized so many peoples across the globe. 

In short, the US must not only stand for the rule of law at home, but ensure that our financial 
institutions do not contribute to or facilitate corruption abroad. 

Accordingly, I am today introducing legislation that would significantly increase the transparency 
of the international banking system and pierce the veil of secrecy that for too long has made it 
possible for institutions and individuals operating in largely unregulated off-shore jurisdictions to 
gain unfettered access to the U.S. financial system for purposes of legitimizing the proceeds of illegal 
activity. The legislation would, among other things: 

(1) require a financial institution that opens or maintains a U.S. account for a foreign entity that is 
not publicly traded to identify, and maintain a record of the identity of, each direct or beneficial 
owner of the account and help banks in that process by making it a crime to misrepresent the 
true ownership of an account to a bank; 

(2) prohibit U.S. financial institutions from opening or maintaining correspondent accounts with 
so-called "brass plate" banks - most often in off-shore locations — that are not licensed to 
provide services in their home countries and are not subject to comprehensive home country 
supervision on a consolidated basis; 

(3) eliminate a significant gap in current US law by expanding the list of crimes committed on 
foreign soil that can serve as predicate offenses for money laundering prosecutions in the US, 
including the misappropriation of IMF funds; and 

(4) prioritize the issues of governmental corruption and insider self-dealing in the global fight 
against money laundering. 

(5) direct the US government to seek new international standards for OMney laundering, especially 
as it relates to governmental corruption. 

It is self-evident that the old models for combating traditional criminal activity by "following the 
money" must be supplemented with new and innovative methods for addressing the increasingly 
endemic corruption and cronyism that have come to characterize an alarming number of nations 
■round the world. 

The legislation that I am introducing today is intended to supplement and reinforce current money 
laundering laws and is based on money laundering vulnerabilities identified in past hearings of this 



199 



Committee by law enforcement ofTicials and recognized authorities on flnancial crime. I am 
confident that other constructive approaches will be offered by Members of thb Committee and by 
the Administration. 

Indeed, I anderstand that later this week, the Administration will unveil its long-overdue national 
money laundering strategy, which was mandated by legislation that originated in this Committee 
and was championed by our distinguished colleague from New York, Ms. Velazquez. It is certainly 
the hope and expectation of this Committee that the strategy will be a valuable source of guidance 
as we fulfill our legislative responsibilities in the critical areas that are the subject of Ibis week's 
hearings. 

Money laundering may seem like a relatively modest crime, but it is a window into greater crimes 
involving how illegal funds were accumulated in the first place. The allegations, for instance, that 
American and European banks have facilitated money laundering for Russian organized-crime 
figures underscore how intractable a problem corruption in Russia is and how vulnerable Western 
institutions are to the lure of servicing one of the world's most virulent kleptocracies. 

I first used the term kleptocracy in 1986 in relation to Ferdinand Marcos and the people of the 
Philippines. The goal of Congress in the Marcos investigation was to return looted money back to 
the Filipino people. Likewise, our aim in this case should be to shine the spotlight of accountability 
on the problem of corruption and endeavor to help return looted wealth to the Russian people. 

Russia is hardly the first country to be victimized by a culture of corruption. The plundering of the 
Philippines under Marcos, the looting of Zaire by Mobutu and Indonesia's crony capitalism during 
the last years of Suharto stand as parallels. What sets Russia apart is the pervasiveness of 
politically tolerated corruption in a country of such sweeping geographic size and seminal 
geopolitical significance. 

The Russian government estimates that criminal syndicates control 40 percent of the economy and 
perhaps half of the country's banking assets, though others put the figures higher. In any country 
where political stability is questionable and legal protections of property are unreliable, those who 
come to control wealth, legally or otherwise, can be expected to cast a "no confidence" vote with 
their savings and shift their capital to safe havens abroad. In Russia, theft has exceeded investment, 
resulting in a dramatic plunge - about 40 percent in the last decade - in economic activity and a 
disillusioned and impoverished society. 

The question is how the West should respond to this crisis. The American people have a vested and 
humanitarian interest in helping the Russian people make a successful transition from communism 
to democracy. But, there is no credible way to suggest that taxpayers should support assistance to a 
government which allows insiders to recycle aid from the West in the form of laundered bank 
deposits, personal investments in the stock market or Pebble Beach real estate. 

Russia, the land mass most similar to our own, has been kept back for most of tbu century because 
of the Big "C - Communism — and has been dispirited for much of this decade because of the little 
"c" - corruption. 

The struggle of the last half-century was to defeat the blasphemous social experiment called 
Communism. The challenge of the next SO years will be to constrain the insidious societal cancer of 
corruption and misgovemment The second struggle may well prove more difficult, because avarice 
is a more fundamental aspect of human nature than the Communist precept that people are subject 
to historical forces beyond the individual's control. 



200 



Government in the Communist era lacked legitimacy because it ruled without the consent of the 
people. The new governing elite in Moscow has squandered the credibility it gained through 
democratic elections and effectively delegitimatized itself by failing to protect citizens from the self- 
serving greed of those in power. 

Where should we begin? By enforcing our laws, issuing indictments if necessary. Such actions 
might prompt Russian prosecutors to do the same, calling Russia's new class of thieving oligarchs 
to account for domestic crimes more serious than international banking violations. We should also 
emphasize retrieving stolen assets for the Russian people. 

For the Russians' part, instead of propelling the flight of capital through a banking system that 
increasingly serves merely as a platform for money laundering, they should establish community- 
oriented banks and credit unions. No nation, after all, can prosper if it lacks institutions where 
people can safely put their money and seek secure loans. 

Russia would be well-advised in its own self-interest to seek the opening of branches of well- 
regulated Western banks in which people can trust that their savings will be turned into loans for 
local enterprises. In addition, Russian authorities may wish to consider imposing effective 
restrictions on the ability of their companies to use foreign banks or offshore corporate structures 
located in jurisdictions with inadequate financial regulatory systems. When western financial 
institutions are used as conduits for illegal commerce, the rule of law can ultimately be expected to 
prevail. But this expectation is not warranted when dealing with offshore financial jurisdictions 
designed as havens for rogues and thieves. 

Parenthetically, to the extent that Russian parliamentarians or others purporting to speak for the 
Russian people accuse the Committee of overstating the problem of Russian crime and corruption 
to score political points against the Clinton Administration or denigrate the Russian people, we 
should keep in mind the following remark by President Yeltsin in a February 1997 speech: "The 
criminal world has openly challenged the state and launched into open competition with it." 

From an American perspective the principal issue isn't who lost Russia, but how can we save 
Russian democracy. It would be an exaggeration to suggest that Russia is an economic Vietnam, 
but it would not be to note that any sense of history requires that the US should take all credible 
steps to ensure that the Cold War u not revisited. In this context, the question looms large: What 
should we now do in the wake of a decade of failed efforts? 

Our policymakers have an obligation to ensure that the corrosive impact of foreign corruption b 
blocked from our shores. America may be as challenged today by the threat of a deterioration of 
values - galloping corruption - as it was yesterday by the menace of Marxist ideology. 

During the Cold War, when national security was the central concern, secrecy was of paramount 
importance in protecting a country's citizens. Now that economic issues have become paramount, 
transparency holds the key to protecting individual citizens. 

in the final measure, America's challenges are vastly more manageable than Russia's. All we have 
to do is show fidelity to time-honored values. What Russia must do is find a new set of values that 
fits its people and times. 

The 21" century may be disproportionately more about economic policy and the intertwining of 
economics and politics in increasingly sophisticated markets. In this regard, US world leadership 



201 



relates to our policy toward Russia and our policy toward China. In both cases, relations are rocky, 
based in part upon the Kosovo war where Russia and China both felt they were unnecessarily 
embarrassed for different reasons and also because of corruption which has imploded Russian 
society and jeopardized the movement toward democracy in China. 

Public service is about idealism, not self-enrichment. In Russia it appears there is a serious 
breakdown in public ethics which has led to the development of virtual anarchy stemming from a 
culture of corruption. When laws do not exist or are not enforced, governance becomes a black 
hole. 

The Committee's goal is to advance the cause of accountability in Russia and in the international 
banking sector; to promote democracy and true free markets in Russia and to promote the return 
of illegally or improperly diverted funds to the Russian people. 

Now I want to speak directly to the Russian people. 

As Chairman of a Committee of Congress, I would like to emphasize 
that the American people believe that Russians are a great and heroic 
people. No people on the planet have undergone greater deprivation in 
this century than the Russian people, who were held back for decades 
by a dictatorial creed called communism and today are being deprived 
as a result of corruption. 

The American people want to help the Russian people. 

In this century, Americans and Russians together successfully fought 
the greatest war of our times. World War II, against the forces of 
fascism. Today we must ally to fight against corruption. We must 
fight for the rule of law, for the Russian people to hold their 
governmental leaders accountable. 

This hearing is held to underscore the help Congress wants to give the 
Russian people and reformers in the Duma. We want money stolen 
from Russia by a new class of corrupted politicians and entrepreneurs 
returned to Russia for the benefit of the Russian people. 

Corruption should be punished, not fed. 

uiminiHuimif 



202 

Bern, September 14, 1999 



Statement to the Committee on Banking and Financial Services 

of the U.S. House of Representatives 

for the Hearing on Russian iVIoney Laundering 

September 21 &22, 1999 

By Carta del Ponte 
Federal Prosecutor of the Swiss Confederation 



Mister Chairman, 
Distinguished Members 

It is a privilege to have an opportunity to contribute to your hearings on 
Russian Money Laundering. On behalf of the Govemment of Switzeriand, I 
appreciate the opportunity to submit written testimony for inclusion in the 
record of these hearings on Russian organized crime and money laundering 
activities. These are issues that should concern the \a\N enforcement 
authorities in global financial centers throughout the worid. 

I commend you for your timely efforts to bring leading US and international 
authorities together to collectively share our experiences and engage in 
discussing practical means to further develop intemational cooperation to fight 
intemational crime. In Switzeriand, we are all aware that the scope and 
depth of the problem can only be tackled through an intemationally 
coordinated and dedicated approach. The task is awesome but through 
continued dialogue and joint and cooperative enforcement efforts, we can 
make it much less attractive for criminal elements in Russia or elsewhere to 
use global financial markets to mask the illegal origins of funds. 

In Switzeriand, we have long shared your concems over money laundering 
and have consistently worked to insure that our laws protect our financial 
system from abuse. We consider it our responsibility to ensure that our place 
in the international financial system is not corrupted nor utilized for legitimizing 
the profits of illegal activities. Generating huge profits through illegal activities 
is only beneficial if those profits can be used for other purposes. For 
example, a mountain of cash, regardless of the currency, has no benefit 
unless it can be applied to other investments or to other purchases. If nations 
are vigilant and work aggressively to prevent their financial institutions from 
becoming a mechanism for funneling illegal proceeds back into the 
commercial mainstream, we will not only succeed in combating money 
laundering, but we will discourage people from engaging in large-scale 
criminal acts. 



203 



This explains the early priority that the Swiss authorities have given to the 
fight against money laundering. This priority has been visible on three fronts: 
strengthening of the Swiss criminal code; enhanced regulation of Swiss 
financial institutions; and, increased cooperation with international 
enforcement efforts. 

In the mid 1980s, when global law enforcement authorities began to 
appreciate the significance of money laundering to organized criminal 
enterprises, Switzeriand made an assessment of the adequacy of its laws. 
Unfortunately, like many countries, the Swiss criminal code did not sufficiently 
address the threat presented by money laundering. As a result, Switzeriand 
developed more specific criminal statutes to target this burgeoning 
phenomenon. Therefore, after drafting a preliminary amendment of its 
Criminal Code in 1986, Switzeriand has implemented several statutes and 
regulations and taken other administrative actions that are specifically 
designed to combat money laundering through direct enforcement, 
domestically and through greater cooperation with intemational investigations 
and prosecutions. 

In the process of creating these new enforcement mechanisms, reference 
was made to existing US law and collaborative discussions were held with our 
US counterparts. Furthermore, the recommendations of the Financial Action 
Task Force on Money Laundering (FATF) were fully implemented. The 
process of amending the Swiss criminal code has been an evolving one. The 
first step was realized in 1990 punishing the laundering of the proceeds of 
crime, wherever the crime may have been perpetrated. It also established the 
obligation of due diligence with regard to customer identification. In 1994 
additional provisions were introduced addressing specifically organized crime 
and the confiscation of assets. In 1997 the Swiss Money Laundering Act was 
enacted, extending to all professional financial intermediaries the obligations 
which already applied to the banking sector. Consequently, in July 1998, the 
Swiss Federal Banking Commission adapted its guidelines conceming the 
prevention and combating of money laundering. For its own part, the Swiss 
banking sector had already taken substantial steps to combat money 
laundering. Thus, since 1977, the Swiss banking sector has been obligated to 
"know their clients" under the provisions of the Convention on Due Diligence. 

As a result of the efforts of the Swiss law enforcement authorities and the 
Swiss banking sector, Switzerland is considered a model among nations in 
terms of the steps It has taken to combat illicit financial transactions, and has 
been so recognized by the US law enforcement authorities. Over the past 1 5 
years, the US bank regulatory approach to combating money laundering has 
gradually moved closer to the Swiss model by moving away from burdensome 
and questionably valuable transaction reports to a system of obligating banks 
to have a greater understanding of their customers ordinary transaction flows 
and to report occurrences that are out of the ordinary to the appropriate 
officials. We applaud the United States for this transition and hope that in 
time there is greater uniformity in the standards that apply to financial 



204 



institutions throughout the world in connection with anti-money laundering 
efforts. 

However, national legislation alone cannot address problems which go 
beyond national boundaries. The emerging global economy and its assorted 
tools of instant electronic communication have created new opportunities for 
legitimate economic pursuits and at the same time provided channels for 
illegal purposes. As a result, we must remain vigilant to emerging criminal 
practices and while we evaluate and adapt our domestic laws, we must do the 
same on the international level as well, to maintain the appropriate level of 
international collaboration in the face of such efforts. 

Since 1959, Switzerland has actively participated in European initiatives to 
combat international crime. Switzerland was an early signatory to both the 
European Convention on Mutual Assistance in Criminal Matters, the 
European Convention on Extradition and the Council of Europe Convention 
on Laundering, Search, Seizure and Confiscation of the Proceeds from Crime. 
Also, after concluding several bilateral agreements with the United States to 
ensure cooperation in criminal matters, in 1973, Switzerland amended its 
statutes and introduced the Federal Act on International Mutual Assistance in 
Criminal Matters which went into effect on January 1 , 1983. This act is 
significant because it allows Switzerland to provide assistance in international 
criminal enforcement matters, without the existence of a formal treaty. 

The 1983 Act and its underlying expression of a clearly defined political will 
was put to a major test in 1986 in connection with the Philippine govemment's 
prosecution of the Marcos case. Switzerland did not hesitate to honor the 
request of the Philippine government to freeze funds allegedly taken illegally 
by Mr. Marcos and members of his family and deposited in their names in 
Swiss banks. In that case and in view of the evident legitimacy of the matter, 
the Swiss Constitution provided the basis for cooperation despite the absence 
of a formal treaty between Switzerland and the Philippines. A similar 
reasoning was applied when the government of the Republic of Congo sought 
help in tracing the assets of former president Mobutu. In that case, 
Switzerland was the only country to reply favorably to Congo's request. 

In addition, our investigation into the financial dealings of the brother of former 
President Salinas of Mexico, led to the freezing of over USD 100 million in 
assets. International co-operation with the United States and Mexico, 
including 110 witness interrogations, was instrumental in the effective 
proceeding of this case. It is now up to the Geneva prosecuting magistrates to 
bring it to its conclusion. 

These circumstances demonstrate a long-standing willingness to engage with 
our international partners and have prepared us to confront the current and 
future challenges such as organized crime of Russian origin. 



205 



As early as 1994. Russia and Switzeriand concluded agreements on mutual 
judicial assistance and police co-operation. These instruments were 
complemented in April 1998 by a memorandum between the Office of the 
Attorney General of Switzerland and the Office of the Prosecutor-General of 
the Russian Federation aimed at strengthening co-operation against 
organised crime and money laundering within existing national legal 
frameworks. Switzerland and Ukraine signed a similar memorandum in April 
1999. The two latter documents are designed to facilitate the exchange of 
information concerning organised crime and money laundering. Ukraine has 
also ratified most of the Council of Europe conventions concerning 
international mutual assistance in criminal matters. 

In 1998 Switzerland prosecuted Mr. A. Mikha'ilov, a well-known Russian 
citizen, alleging that he was a member of a criminal organisation. The case 
took place in the Geneva criminal court and set a precedent in Europe for the 
number of letters rogatory issued by the court. In the course of the 
proceedings against Mikha'ilov, the investigating judge in Geneva issued 21 
letters rogatory to foreign states in the space of a little less than two years. 
During the same period, eight letters rogatory were addressed to Switzeriand 
concerning this matter. However, the case did not result in Mr. Mikhailov's 
conviction, in particular because the intensity of international co-operation was 
insufficient. 

In the same year, the Geneva cantonal authorities followed up a request for 
Judicial assistance by the Ukrainian authorities, which led to the indictment of 
Mr. P. Lasarenko, former prime minister of Ukraine, on charges of money 
laundering. 

In November 1998, the Office of the Attomey General of Switzeriand received 
a request for judicial assistance from its Russian counterpart concerning 
suspicions of corruption of high-level officials of the Russian central 
government. Switzeriand agreed to provide judicial assistance. The ensuing 
inquiry in Switzeriand mainly concerned the cantons of Geneva and Ticino. So 
far, it has led to a search of the premises of a large Ticino-based company, 
which is suspected of having paid bribes to the indicted officials in order to 
obtain large contracts in Russia (in particular the renovation of some of the 
Kremlin buildings). In this context, orders were also issued to freeze several 
accounts in Swiss banks. The Geneva Public Prosecutor also opened a 
criminal inquiry into money laundering in response to the first results of an 
investigation conducted by the Office of the Attomey General of Switzeriand, 
of the letters rogatory which were issued on grounds of suspicions of 
corruption. 

In July 1999, the Office of Attorney General of Switzeriand blocked several 
accounts in Switzeriand in response to another request for assistance from 
the Office of the Prosecutor-General of the Russian Federation. This request 
concemed various persons suspected - in Russia - of having embezzled vast 
amounts of public funds with the aid of companies located in Switzeriand. In 



206 



this case, premises in Switzeriand also were searched on the orders of the 
Office of the Attorney General of Switzerland, and material evidence was 
seized. 

The cases outlined above - which are only examples - demonstrate that the 
Swiss law enforcement authorities are willing to co-operate actively with their 
Russian counterparts in the fight against organised crime and money 
laundering, who work courageously under very difficult conditions. 

Switzerland is one of the few countries so far to have carried out 
investigations of such importance. Often in money laundering cases, only the 
second and third layer of the laundering process take place in Switzerland, 
whereas the predicate offence and/or the introduction of illicit funds into the 
banking system take place in other jurisdictions. If these jurisdictions do not 
co-operate the prosecution of cases in Switzerland is seriously hampered. 

Switzerland appreciates the open co-operation it has enjoyed with US 
enforcement agencies in the exchange of intelligence and police information 
concerning Russian organised crime. We look forward to furthering these 
efforts in future cases. Such co-operative efforts are essential when 
combating this form of criminality. 

Switzerland has established an office within the Federal Office of Police to 
identify and analyse organised crime originating in central and eastern 
European countries, and in Russia. In addition, the Swiss banking 
supervisory authority, the Swiss Federal Banking Commission, maintains 
particular contact with the US financial institution supervisory authorities 
concerning alleged instances of money laundering. 

The Swiss Federal Banking Commission takes alleged cases of money 
laundering very seriously and pursues them very intensively. It also examines 
the banks for compliance with Switzertand's strict obligations to exercise due 
diligence. In this context it worths closely with numerous foreign authorities. 

If I try to sum up on the lessons we can draw at this stage on this subject, I 
would first like to recall a couple of facts and statistics: every year, 
Switzeriand provides legal assistance in over 2000 intemational cases. In 
1998 for instance. Switzeriand and the United States have handled bilaterally 
more than 120 requests for Mutual Legal Assistance. In one of the more 
publicized cases, Swiss authorities confiscated and shared with the US 
Govemment over USD 160 million of Colombian drug money. 

However, such good news should not lead us to believe that we have gained 
the upper hand on money laundering and organized crime. On the contrary, 
the very intricacy, magnitude and multifaceted nature of the intemational flow 
of illicit assets, particulariy from Russian origin, calls for increasing 
overarching co-operation, both in the refinement of our natbnal legal arsenals 
and in effective collaboration of parent agencies, regulating bodies and the 
financial sector itself. In implementing our duties as prosecutors, nothing less 
Is at stake than the upholding of our democratic systems and the intemational 
rule of law. 



207 
LEGAL ANNEX 

1 . Swiss legislation to combat money laundering 

Swiss legislation to combat the use of the financial system for money 
laundering has been progressively tightened over the last few years. Since 
the 1980s, a series of laws and regulations have been implemented in the 
form of penal and administrative provisions, and specific banking regulations 
relating to banks and non-bank financial institutions. 

1.1. Penal Code: Money laundering and lack of vigilance in financial 
operations 

In Switzeriand, provisions related to money laundering were written into the 
Penal Code in two stages. First, money laundering and failure to exercise due 
diligence became criminal offences on 1 August 1990, with the coming into 
force of articles 305b/s and 305ter. These first provisions were followed by a 
"second package" of amendments of the penal code which took effect in 
1994. 

Article 305b/s penalises obstacles to the "establishment of provenance, the 
discovery or the confiscation of assets" proceeding from crime. The predicate 
offence can be any crime under the penal code (no restriction to drug related 
offences). Money laundering is also punishable if the underiying offence was 
committed outside Switzeriand. Anti-money laundering legislation can also 
apply to transactions in all tradable assets including, foreign currency, 
certificated and uncertificated securities, precious stones and metals, as well 
as claims and objects having intrinsic economic value. Convictions may be 
obtained with respect not only to persons having knowledge of the criminal 
origin of funds, but also of those who should have presumed such criminal 
origin. Article 305ter of the Penal Code supplemented article 305/j/s by 
introducing a general requirement for financial intermediaries to ascertain the 
identity of customers through verification of "the identity of the beneficial 
owner with the diligence that can reasonably be expected under the 
circumstances" in the case of financial operations carried out in the exercise 
of their profession. This due diligence requirement with respect to financial 
transactions applies to all intermediaries who receive, manage or assist in 
investing funds on a professional basis, including business lawyers. A second 
package of amendments to the Penal Code resulted in provisions related 
namely to confiscation (articles 58 ff. of the Penal Code, see below) and 
organised crime (article 260terof the Penal Code, see point 3). 

1.2. Banking regulations 

An obligation to identify the client was first imposed on the banks in 1977 by 
the Agreement on the Swiss banks' code of conduct with regard to the 
exercises of due diligence. The Agreement has been updated several times 
since. The cun-ent Agreement on the Banks' Obligation of due Diligence 



208 



(CDB 1998) entered into force on 1 July 1998. The Swiss Federal Banking 
Commission considers the CDB a minimal standard to which it refers as a 
supervisory authority when interpreting the notion of irreproachable activity 
which is a condition for granting and renewing a banking licence. The core 
substance of the CDB consists of rules on the identification of customers and 
beneficial owners. Articles 2 to 5 of the CDB are principally concerned with 
verification of the identity of the contracting party and the identification of the 
beneficial owner. They inspired the formulation of corresponding articles in the 
Penal Code concerning lack of diligence in handling assets (article 305ter of 
the Swiss Penal Code, cf. above) and Recommendations 1 and 1 1 of the 
Financial Action Task Force (FATF). 

In March 1998, the Swiss Federal Banking Commission (SFBC) adopted 
modified Guidelines concerning the prevention and combating of money 
laundering which came into force on 1 July 1998 (Circ. 98/1) to bring them 
into line with the new Money Laundering Act (see point 2.3.) The prime 
objectives of these Guidelines is to specify the intermediaries submitted to the 
surveillance of the SFBC and to extend the duties of diligence contained in 
the MLA of 1997. The SFBC Guidelines profile for example the kind of 
transactions that should prompt banks to pay special attention and perform 
supplementary checks: a non-exhaustive list of 30 pointers which may arouse 
suspicion that money laundering may be involved is provided. This list may be 
used to raise the awareness of bank employees, as described in FATF 
Recommendation 28. 

1.3. Comprehensive administrative legislation: the Federal Act on the 
prevention of money laundering in the financial sector (Money 
Laundering Act, MLA) of 10 October 1997 

The penal law and specific banking regulations have made a major 
contribution to increasing vigilance in the financial sector. They focus on the 
banking sector, notwithstanding the fact that the provisions of the Penal Code 
were designed to cover all areas of the financial sector. The Money 
Laundering Act was introduced to extend to all professional financial 
Intermediaries the obligations which already apply to the banking sector, and 
to introduce the duty to notify the competent authorities of any suspicions they 
may have regarding money laundering. These two dimensions amount to the 
complete incorporation of the FATF recommendations into Swiss law. 

1.3.1. Scope of the MLA 

The Money Laundering Act applies to all financial intermediaries, whether 
already subject to federal supervision before the entering into force of the 
MLA or not. The category of intermediaries which are already regulated by 
special federal laws and subject to federal supervision includes the banks, the 
securities dealers, investment fund manager, and the life insurance sector 
(article 2, paragraph 1 ). 

All other financial Intermediaries which are not subject to any special 
supervision under federal law also fall under the scope of the MLA (article 2 



209 



paragraph 2). The law contains a broad definition of the financial activities 
considered to be particularly vulnerable to money laundering. Article 2 
paragraph 3 enumerates these activities in line with the FATF 

Recommendations'' . 

The law applies namely to payment services which are executed without the 
involvement of a bank. Bureaux de change and similar organisations are 
subject to the law, precious-metal dealers, and all asset managers which are 
not already authorised and supervised by the Banking Commission. 

1 .3.2. Obligations of due diligence 

Chapter 2 of the law defines the obligations placed upon legal or natural 
persons - namely the obligation to check the identity of the counter party to a 
contract (article 3) and of financial beneficiaries (article 4), to make repeated 
checks on their identity (article 5), the duty to clarify specific situations (article 
6), the duty to obtain documentation and to record all transactions, the 
obligation to declare suspicious transactions (article 8) and also organisational 
measures (article 9). Suspicious transactions must be reported without 
delay to the Money Laundering Reporting Office (MROS). Chapter 6 of the 
MLA stipulates the penalties for failure to comply with the obligations provided 
for in Articles 3 to 9. 

1.3.3. Surveillance 

The Swiss Federal Banking Commission (FBC) Is in charge of monitoring 
compliance with the MLA by all intermediaries under its supervision. The 
same applies to the Federal Office of Private Insurance (FOP) in the 

framework of its supervision of insurance companies. The MLA does not limit 
the supervisory powers given to the SFBC on the basis of the Banking Law. 
An infringement of the MLA provisions can thus also lead to punitive 
measures in accordance with specific surveillance legislation. In addition, the 
supervisory authorities are required to inform the penal authorities if they are 



'' "Persons who on a professional basis accept, keep on deposit or help invest or transfer 
assets belonging to third parties shall also be deemed to be financial intermediaries, 
particularly persons who: 

a. undertake credit transactions (including consumer credit or mortgages, factoring, financing of 

commercial transactions or financial leasing), 

b. provide services related to payments, including electronic transfers on behalf of third parties. 

or who issue or manage means of payment such as credit cards and travellers cheques, 

c. trade, on their own account or for third parties, in bank notes or cash, money market 

instruments, currency, precious metals, raw materials or securities (paper or other rights) 
and their derivatives, 

d. offer or distribute shares in funds, in the capacity of distributor of a Swiss or foreign 

investment fund within the meaning of the Federal Act of 18 March 1994 on investment 
funds, or in the capacity of representative of a foreign investment fund, if they are not 
subject to a supervisory authority set up by special Act, 

e. undertake asset management, 

f. make investments as investment adviser, 

g. keep or manage securities. * 



210 



aware of violations of penal provisions contained in the specific surveillance 
legislation or in the Penal Code (including articles 305b/s and 305fer). 

The Money Laundering Act requires all financial intermediaries to be 
authorised. It enables authorised Self-regulatory organisations (SROs) to 
implement the measures to combat money laundering in their sector of 
activity. Such SROs must be authorised and are supervised by the Money 
laundering control authority which is integrated into the Federal Finance 
Administration. It is in addition responsible for directly monitoring compliance 
with the obligations laid down in chapter 2 of the MLA for legal and natural 
persons who are not subject to any other federal supervision. 



2. Swiss efforts to combat organised crime 

Organised crime is unfortunately a widespread phenomenon in contemporary 
society. It is both highly complex in structure and multinational in character. 
One of the main problems is that criminal organisations have succeeded over 
the years in infiltrating political, economic and financial systems and in 
Integrating their illegal operations into legal activities. Due to these particular 
factors, organised crime is especially difficu't to identify, define and suppress. 
Traditional enforcement techniques havf consequently been adapted and 
improved with the aim of enab'^iq Switzerland to fight this new form of 
organised crime effectively. 

Swiss criminal law calls for sar jons against all offences that come under the 
category of organised crimf . These include money laundering, corruption, 
fraud, narcotics and amris trafficking, pornography, etc. It also facilitates 
investigations into these offences. During judicial proceedings, the judge can 
order the waiving of banking secrecy and obtain account information from the 
bank concerned. Banking secrecy is therefore not an obstacle to the pursuit 
and conviction of the perpetrators of organised crime. 

On 1 August 1994, the Swiss parliament improved these laws by adopting a 
series of articles aimed at combating organised crime (Art 260 ter, section 1 
of the Penal Code (PC): Participation in a criminal organisation declared a 
criminal act) and strengthening measures related to the confiscation of 
assets of illicit origin, including the reversal of the burden of proof In cases of 
organised crime (PC, Art. 58-60). 

In 1994 also, the Central Offices for Criminal Police Matters were 
established within the Federal Office of Police. They are charged with 
conducting investigations into narcotics trafficking and counterfeiting, co- 
ordinating the inquiry procedures between Switzerland and foreign countries, 
and evaluating all information related to organised crime. 

On the international level, Switzerland collaborates in the fight against 
organised crime on several fronts. It is a member of Interpol and is thus 



211 



involved in all exchanges of information between police authorities. 
Switzerland has ratified several international agreements, both bilateral and 
multilateral, through which it has committed itself to providing mutual 
assistance in criminal matters. 

3. Swiss efforts to fight corruption 

The Swiss penal code punishes both active corruption (Art. 288) and passive 
corruption (Art. 315) with prison sentences. Currently, active corruption is less 
severely punished than passive corruption. However, the relevant laws are 
being revised with the aim of making the penalties more severe for active 
corruption, as well as for the corruption of foreign officials. 

On 17 December 1997, Switzerland signed the OECD Convention on 
Combating Bribery of Foreign Public Officials in International Business 
Transactions. Furthermore, Switzerland actively participated in preparing this 
convention, in particular, by chairing the working group charged with drafting 
the text of the convention. A bill containing a general revision of corruption 
offences and the ratification of the OECD Convention is currently being 
discussed in Parliament. 

In addition, the Swiss Agency for Development and Cooperation supports 
good governance and the fight against corruption in carrying out its projects in 
developing countries. 

4. International assistance in criminal matters offered by Switzerland 

Switzerland provides extensive international co-operation in criminal 

matters. Requests for mutual assistance in criminal matters are becoming 
increasingly frequent in particular because of the growth of organised crime 
on an intemational level (narcotics and arms trafficking, corruption, trafficking 
in women and children). Switzerland co-operates actively with foreign judicial 
authorities in providing extensive judicial assistance. Switzerland receives 
approximately 2,500 requests from abroad for assistance each year. In the 
large majority of cases, assistance is granted without any difficulty. The 
execution of these requests often requires the sequestration of assets located 
on Swiss territory and of bank documents relating to the alleged offence, and 
their transfer to the requesting state. In this case, when all the conditions set 
out below for assistance are met, the Swiss authorities can lift banking 
secrecy. 

Switzerland grants international mutual assistance in criminal matters on the 
basis of: 

• the European Convention on Mutual Assistance in Criminal Matters of 

20 April 1959. 

• the European Convention on Extradition of 13 December 1959. 



212 



• The European Convention on Laundering, Search, Seizure and 
Confiscation of the Proceeds of Crime of 1 September 1993 (the United 
States participated in the drafting of this convention but has failed to sign it 
to date) 

• bilateral treaties on mutual assistance in criminal matters such as those 
concluded on 25 May 1973 with the United States of America, on 25 
November 1991 with Australia, and on 7 October 1993 with Canada. 

• the Federal Act on International Mutual Assistance in Criminal Matters 

which came into force on 1 January 1983. This law permits Switzerland to 
grant judicial assistance also to states with which Switzerland has not 
concluded a bilateral agreement and which are not party to the European 
Convention. 

The conditions required for judicial assistance are essentially the following: 

• Double criminality: The fact which forms the basis of the request for 
judicial assistance must also be punishable as a criminal offence in 
Switzerland. 

• Speciality: The foreign authorities must commit themselves to use the 
information transferred to them by Switzerland solely for the purpose for 
which it was originally given. In particular, this means that the requesting 
authority is not allowed to transfer information obtained in the course of a 
mutual assistance proceeding to an authority of a different nature. 

• Proportionality: A sufficient relation must exist between the crime under 
investigation abroad and the requested measures in carrying out the 
request for assistance. 

• Reciprocity: In the absence of a treaty obligation, the requesting state 
must guarantee that it will give a favourable response to a demand by 
Switzerland for judicial assistance should the case arise. 

Amendments to the Act on International Mutual Assistance in Criminal 
Matters, which took effect on 1 February 1997, have eased the process of 
assistance noticeably. In particular, they have clearly shortened the 
procedures involved by limiting the possibilities of appeal and by reducing the 
number of persons permitted to resort to these means to those personally and 
directly affected by the mutual assistance measure. The revised Act also, 
under certain conditions, permits the Swiss criminal prosecution authorities to 
transfer information and evidence to a foreign penal authority on their own 
initiative. Moreover, it has enlarged the powers of the Swiss federal authorities 
to act directly when provisional measures must be taken, as well as in 
complex cases or in cases of special importance. 

5. Assets of dubious origin held by foreign heads of state and politicians 

The Swiss financial centre, like other financial centres, is used by foreign 
heads of state and govemment officials for investing assets. There have been 
individual cases in the past of assets which were found to be the proceeds 



213 



from dubious activities such as coiruption or dishonest management of the 
state. 

In most cases such investments are spread across various countries and 
financial centres. The problem is thus one of international order. 

One specific problem arises with foreign heads of state in office as a result of 
the immunity they enjoy under international law. Immunity under 
intematlonal law protects heads of state - and their assets - from coercive 
measures, in particular those under penal law for the time they are in office. 

Switzerland has a very serious interest in preventing assets of dubious origin 
from reaching its financial centre. However, if assets of dubious origin owned 
by foreign heads of state or politicians nevertheless find their way to this 
country, Switzerland takes measures in co-operation with the country of origin 
to effect the blocking and restitution of the funds in question. 

Responsibility for safeguarding the integrity of the Swiss financial centre lies - 
as far as prevention is concerned - with the financial institutions in the first 
place. The acceptance and management of certain funds can be in breach of 
the Banking Law (Art. 3 lit. c: Guarantee of irreproachable business conduct). 
Anti-money laundering legislation is applicable against money of criminal 
origin (fraud, drug trafficking, see point 2.). If such money arrives in 
Switzerland, the bank concerned must, on well-founded suspicion, report it to 
the authorities and block the funds for five days. During this period, the 
authorities consider whether or which further measures should be taken. 

The Federal Act on International Mutual Assistance in Criminal Matters 

(Art. 18) authorises precautionary measures if an application for intematlonal 
mutual assistance is announced and the conditions for judicial assistance 
appear to be fulfilled (see point 5.). In addition, pursuant to Art. 102 section 8 
of the Federal Constitution, according to which the government (the Federal 
Council) assumes responsibility for the protection of the interests of the 
Confederation abroad, the Federal Council can in certain cases freeze the 
bank accounts and assets of foreign persons. 

The bank supervisory authority (Swiss Federal Banking Commission 
(SFBC)) has refined its guidelines to require the banks to be especially 
vigilant with regard to the acceptance of assets from persons with important 
public functions and from persons close to them. The banks are prohibited 
from accepting funds which they must presume stem from corruption or from 
the misuse of public funds (SFBC circular 1/98). 

Assets are often blocked in connection with an application for judicial 
assistance on the initiative of a foreign authority, which must present or at 
least announce a request for judicial assistance. Experience has shown that 
the restitution of blocked assets poses difficult but not unsolvable problems, in 
particular over questions regarding authorised recipients. In the case of the 



214 



Tormer rresiaent or the Hhllippines Marcos USD 550m could be returned to 
the Government of the Philippines. 

Switzerland is one of the few countries to have taken effective measures in 
recent cases to block and restore to the rightful owners assets of dubious 
origin held on the accounts of foreign heads of state and politicians. To 
provide an example, one can cite the Mobuto affair, where Switzerland is the 
only country of the 18 contacted by the government of the Democratic 
Republic of Congo to have frozen all the known assets of its former head of 
state. 



215 



* Honorable Mr. JamoK A. I^eiich, 

reHEPAJIbiiAR Chairmui of the Cnmmitlee 

nPOKyPATyfA On Banking and Hinancial 

PoccMRcKoa ♦BAr.rAUMM Services, U.S. Mouse of 
iMTwi rai. Mocu., RepreacnUtivcK 



ii/i.m_^. 



Dear Mr. l.each. 



1 am oordially grateftil for your kind invitation to take part in the hearingM of the 
Committee heeded by you on the issues of utili>sation of financial system oi the United 
States by the Russian organized crime in order to Unmder ttic crime proceeds. 

The theme discussed by the C^cmimiltee is of eq)ecially great importance for Russia 
which is seeking now for ortimal economic, legal and organixatinnal measures aimctl iii 
prevention of illegal ciqiital flows from the country and repalrialion of the illegally 
transferred funds. Successful results of our law enforcement in combntting this evil will 
mean the improvement nf Die life conditions for hundreds of thousands of Russian 
nationals. 

I am dci^ly convinced that the finthcoming hearings will allow to develop valiiHble 
recommendations to the flnanoial land law enforcement structures of Russia ond USA in 
counteracting to infiltration of dirty money into our financial systems. Rich experience 
accumulated by the U.S. Congress m conducting similar hearings guarantees the 
success. 

Unfortunately, the legal status of the Prosecutor-Oencral of the Russian Fedcnainn 
deprives me of the opportunity to take part in such hearings conducted by tlie l>ie( of 
oth«sr uountiy. I hope that 1 will be able to contribute otherwise to the solution of noble 
tasks determined by the Committee on Banking and Financial Services and by you . 
personally, dear Mr. I..«ach. 

Respectfully and sincerely. Yu. Skuratov, 

'— Prosecutor-Oencral of the RF 




216 



Statement of Representative Judy Biggert (K-il) 

Committee on Banking and Financial Services 

Money Laundering and Corruption in Russia 

September 30, 1999 

Thank you Mr. Chairman. 

I am pleased to participate in this morning's examination of alleged Russian 
corruption. 

Since August, serious charges of the laundering of billions of dollars have been 
reported. 

These reports include allegations that Russian President Boris Yelstin's own 
administration may have benefited from the illegal channeling of huge sums of 
money into foreign accounts. 

These allegations are most disturbing because they begin to raise questions 
about what actually has been achieved in Russia. 

Have these allegations of corruption threatened Russia's domestic stability? Has 
money laundering stunted the growth of true democracy in Russia? Has the 
Kremlin itself doomed any hope for a solid foundation for a market-based 
economy? 

And what of U.S. shareholders and U.S. corporations who may have fallen victim 
to this corruption? 

The committee also should consider if these reports raise red flags with other 
U.S. taxpayer-funded programs, such as loans guaranteed to Russia through the 
Export-import bank. 

Do we owe the American public a complete and full accounting of all Russian aid 
programs? 

I hope all of our panelists today will shed light on these questions and many 
others as they provide their views on the Russian corruption problem. 

I thank Mr. Leach for holding this very important discussion and look forward to 
hearing testimony from today's panelists. 

Thank you Mr. Chairman. 



217 



STATEMENT OF REP. JOHN J. LaFALCE 

BEFORE THE COMMITTEE ON BANKING 

AND FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

HEARING ON MONEY LAUNDERING, CRIME, 
AMD CORRUPTION IN RUSSL\ 

SEPTEMBER 21, 1999 

Mr. Chairman, thank you for holding these important hearings. 

Recent press reports have revealed major problems in the areas of money 
laundering, diversion of funds, and crime and corruption in Russia that have reached into 
the U.S. banking system. The situation has called into question the efficacy of our 
money laundering statutes and the monitoring capabilities of our international financial 
institutions. 

1 am very concerned with the serious allegations of crime and corruption in Russia 
and the alleged infiltration of the country's goverrunent institutions by organized crime. 
While we are not in any position to dictate how a country should run its internal affairs, 
we are fully entitled to an accounting of whether the funds provided by international 
financial institutions are being used for their intended purpose. These funds involve 
significant U.S. taxpayer resources and it is our duty to ensure that they are not misused. 

At the same time, I believe that our national security and the stability of the 
world's financial system demand our continued constructive involvement with Russia. 
As a democracy experiencing growing pains, and still purging itself of the political and 
economic ghosts of its Soviet past, Russia needs our help. Isolating Russia, and isolating 
ourselves fi-om Russia, is not the solution. 

I see little to gain in the simplistic option some suggest of abandoning as 
substantial and as troubled an economy as Russia's. 

I recognize there are challenges to our continued engagement, and the memorable 
words of Sir Winston Churchill more than a half a century ago still ring true: "I cannot 
forecast to you the action of Russia. It is a riddle wrapped in a mystery inside an 
enigma." However, as painful and fiiistrating as the process might be, I believe that the 
ultimate payoffs fi-ora our continued engagement with Russia are greater than the risks. 



218 



It is, however, time to ask some tough questions and get the answers we need to 
make this policy of engagement work better. We should continue to encourage economic 
and political reform in Russia, but we should also impose tough conditions on the 
assistance we give and find better mechanisms for monitoring compliance. Unless we 
can obtain the necessary cooperation fi-om Russia to make that possible, our long-term 
involvement could be at risk. 

I do believe that there is one area of our policy that deserves particular scrutiny, 
and hopefully will teach us some important lessons. A major part of what went wrong in 
Russia was the decision to embark on a program to privatize state-owned enterprises. 
Privatization itself can be of great benefit to a society. As I wrote in a letter to President 
Clinton in March, 1995, it can serve two important purposes: (1) to achieve greater 
equity and new opportunity in the distribution of a society's wealth and assets; and (2) to 
restructure key resources, such as utilities, transportation, banks and trading companies, 
to permit them to respond to market forces rather than government dictates. 

I said then, and I re-emphasize now, that "the United States has an interest in 
ensuring that economic opportunities provided by privatization efforts are widely 
available ...in a way that allows greater access to the wealth of society... (A)n equitable 
approach to privatization will help ensure a more stable economy." 

But there is another approach to privatization ~ what I called "patron" or 
"nomenklatura" privatization — and it is the road Russia took. Russian privatization has 
come to mean the wholesale transfer of valuable state assets to a small group of tycoons 
who are more interested in taking value out of the country than investing in it. This type 
of privatization concentrates wealth and puts an economy at risk. 

Secretary Summers, I would appreciate your analysis of what went wrong and 
what we can learn about managing such situations in the future. And, Mr. Chairman, I 
would also ask that the letter I mentioned and other statements I have made on the 
privatization issue be inserted in the record. 

Let me now turn to the specific issue of money laundering. Of the many public 
policy challenges facing lawmakers, the law enforcement community, and regulators 
today, none may represent as significant a threat to our financial system as money 
laundering does. The wholesale "cleansing" of illegitimate profits derived fi-om criminal 
activities reaches staggering proportions - by some estimates, between $100 and 300 
billion in the U.S. alone, and nearly $500 billion - one-half trillion! ~ worldwide. By 
comparison, this figure dwarfs the GDP of many small- to mid-size nations. 



219 



Press reports have now alleged that up to $10 billion of possible illicit Russian 
money passed through one bank. However, the facts of this particular case are very 
sketchy and the criminal authorities are investigating. It would be premature for us to 
pass judgment on any aspect of this case without a fiill accounting of the facts. I look 
forward to the findings of the current ongoing criminal investigations. 

The Banking Committee last took legislative action on the money laundering issue 
in 1994, when we passed the Money Laundering Suppression Act. Up until recently, the 
emphasis on financial institutions' compliance with cumbersome paperwork requirements 
worked against the effective enforcement of money laundering laws. The 1994 Act made 
reporting requirements under the Bank Secrecy Act more meaningful and more usefiil to 
law enforcement. 

But even with these targeted changes, every so often we learn of egregious cases 
that our regulatory system is supposed to catch but misses altogether. And often they 
occur in vulnerable, emerging democracies like Mexico and Russia, places where the rule 
of law is still, unfortunately, not fiilly consolidated. When the big cases strike, we begin 
to wonder whether the regulatory system, our first line of defense, truly works. 

I do believe, Mr. Chairman, that it would have been productive for us to examine 
regulatory issues in this hearing, which are ripe for revisiting. I regret that the bank 
regulators are not here, either today or tomorrow, to explain to us what may or may not be 
wrong with our current regulatory system. I hope we will hear fi-om them in the not too 
distant fiature. 



220 
APPENDIX 



STATEMENT OF REP. JOHN J. LaFALCB 

COMMITTEE ON SMALL BUSINESS 

HEARING ON 
"THE PRIVATIZATION EXPERIENCE: STRATEGIES AND IMPLICATIONS FOR 

SMALL BUSINESS DEVELOPMENT" 

April 14, 1994 

The Small Business Committee convenes this morning to 
examine the issue of privatization. It is an economic process 
which U.S. policy supports, but there remains substantial 
confusion about what it is and how it works. 

It is imperative that we achieve a better understanding of 
the policy implications of this important means of economic 
transformation. Privatization carries with it the hopes of the 
emerging democracies, for whom it is the primary vehicle for 
creating market economies under a rule of law, and facilitating 
economic growth and development. If accomplished successfully, 
privatization can legitimately be expected to increase economic 
efficiency and provide broad-based benefits to a country's 
citizens. However, if poorly implemented, privatization may only 
serve to channel resources to the same or different powerful 
elite groups. The issue this Committee meets to consider is 
whether privatization in practice lives up to its promise. 

The worldwide push for privatization in the past decade 
responds to both ideological and economic changes . Governments 
once committed to state ownership as a matter of ideology or to 
state-created enterprise as the quickest path to modernization, 
now see privatization and expanded private markets as the best 
means to increase competition, enhance efficiency, and meet 
urgent infrastructure and development needs. Numerous Asian and 
Latin American countries have made privatization a central 
feature of broader market -oriented reforms and democratization 
efforts, while reforms in Central and East European nations and 
the republics of the former Soviet Union are virtually synonymous 
with privatization. 

Much of the hope surrounding privatization is based on the 
encouragement and support for small business that it can provide. 
Proponents herald privatization as a means for small-business 
entrepreneurs in particular to create their own economic 
opportunities and "grab a piece of the action, " and in the 
process spur general development . The Enterprise Funds for 
Poland and Hungary were one manifestation of this approach. 

Yet, however well-intentioned, the privatization process has 
not always resulted in equitable opportunities for citizens and 
businesses who Wish to participate. Instead, we often see 
•patron" or "nomenklatura" privatization, which allows an elite 
with influence and power to control the outcome and rewards of 
privatization . 

In Mexico, the Indian uprising in the southern state of 



221 



Chiapas reminds us that, however significant a country's ect.iomic 
reforms may appear, its success depends ultimately on significant 
improvements in equity. In this case, Mexico's removal of 
Constitutional protections against privatization of communal 
farmlands was one of the sparks that lit the fire of political 
reform nationwide. This morning we will hear more details 
regarding the consequences of Mexico's ptivatization strategies 
from our witnesses. 

A world away from rural Chiapas, officials of the Russian 
Republic are also engaged in massive privatization of state-owned 
properties. Thousands of small businesses have been sold for 
cash in public auctions, and a system of private vouchers has 
been created to distribute ownership of medium and large-scale 
enterprises throughout the population. Privatization of the bulk 
of Russia's material wealth has set off a scramble for available 
assets in which corrupt, criminal and even violent methods are 
becoming commonplace . 

In this environment, the persons who appear to have 
benefited most from privatization are the former elite of the 
Communist system, the "nomenklatura" of high-level economic 
managers and former party officials with access to information, 
political contacts and foreign currency. While even this 
privatization may be preferable to continued state ownership, 
surely we must strive to do better. 

Countries as diverse as Chile, Malaysia and Poland have put 
up for sale their airline systems, trading companies, banks, 
transportation systems, telephone services, ports and power 
systems. Throughout the world, privatization has raised hopes 
for improved efficiency, reduced bureaucracy, new foreign 
investment and greater prosperity. 

Many of these privatizations appear successful in dispersing 
ownership, enhancing efficiency and increasing competition. But, 
as experience in Mexico and the Russian Republic suggests, other 
privatization efforts have failed to show that private ownership 
and operation are more efficient or respond better to consumers 
and workers . 

The problem may be, not that privatization per se is flawed, 
but that we have developed little basis to measure success. Too 
often, issues of social equity which should be central have been 
ignored. 

This morning we have a distinguished panel of experts on 
privatization who will enlighten us on the process of 
privatization, how it operates in various regions, and what the 
successes and failures have been thus far. We will hear first 
from Mr. James Waddell, Executive Director of the International 
Privatization Group at Price Waterhouse. Mr. Wadell's 
organization has recently developed a data base on privatization 
for A.I.D. 

Next, Mr. Richard Bamett is Senior Fellow and a founder of 
the Institute for Policy Studies. Mr. Bamett is co-author of 
the well-known book Global Reach and has recently published a 
sequel. Global Dreama . Mr. Andera Aslund is Director of the 



222 



Stockholm Institute of Soviet and East European Economics and 
currently is a Guest Scholar at The Brookings Institution. 

Mr. Chris Whalen returns to our Committee bringing his in- 
depth experience in Latin America and a particular focus on 
Mexico and Chile. Dr. Lyxm Nelson is a professor of sociology at 
the Virginia Commonwealth University. He spent half of the past 
three years in Russia and recently published a study on his 
research there entitled Property to the People . 

Finally, Mr. Daniel Singer, Of Counsel with Fried, Frank, 
Harris, Shriver and Jacobson, will provide the legal perspective. 
He is a specialist for the Central and East European Law 
Initiative of the American Bar Association and has traveled to 
Poland to lend his legal expertise to the privatization effort. 



223 



STATSMSNT OF RBP. JOHN J. LaFALCB 

COMMITTEE ON SMAIiL BUSINESS 

HEARING ON 
"PRIVATIZATION: "THE GOALS AND IMPLEMENTATION OF U.S. POLICY" 

May 12, 1994 

The Small Business Committee meets this morning to continue 
its examination of the global privatization process and its 
implications regarding business opportunity and economic equity 
in the societies involved. 

On April 14, the Committee heard from witnesses representing 
practitioners, academics, and consultants. This morning we 
welcome Administration witnesses as we focus specifically on U.S. 
privatization policy: what our goals are and how we implement 
them. 

Privatization is a central tenet of the economic policies of 
more and more countries around the globe, particularly since 1989 
when Eastern Europe and the former Soviet Union began to 
transform their centrally-planned economies to ones that are 
market-oriented. However, there appears to be more concern 
with the number of privatizations as a measure of success--more 
than 8,500 in over 80 countries since 1980, according to the 
World Bank--than with the quality and effects of the conversions. 
Too much is at stake to make this merely a numbers game. 

In my view, the way in which privatization takes place is at 
least equally as important as the fact that it occurs. 
Privatization can be a vehicle for either distributing the wealth 
of a society more equitably or for unfairly concentrating that 
wealth. 

U.S. policy should recognize such differences, and strive 
for the most equitable distribution of existing and potential 
societal wealth as is feasible. I am concerned that U.S. 
policy, as currently conceived and implemented, does not do that, 
and may concentrate its efforts on the objective of privatization 
itself, with little, if any, attention to who benefits and who 
loses in the process. We see too much of the so-called 
nomenklatura or patron privatization which excludes adequate 
opportunity for a broader-based process that would enhance the 
socio-economic conditions of the greater body politic--what I 
would call: Empowerment Privatization. 

Our policy must bring certain standards to bear, and those 
standards must reflect the particulars of a country's experience. 
Privatization comes in many forms and uses an array of methods-- 
bids, shares, auctions, coupons, etc. Perhaps no one method is 
inherently preferable. Moreover, the conditions country-by- 
country are vastly different. As Poland's former Finance 
Minister Balcerowicz recently observed, how privatization 
functions in a country depends on variables such as micro and 
macro economic conditions, debt, human capital and their 



224 



interactions with political conditions. It seems reasonable, 
then, to have multiple criteria by which to measure success 
depending on the situation of the country. 

However, we must not make the mistake of using criteria that 
only look through the prism of economic data. At our last 
hearing, one witness argued that Russian privatization has been a 
huge success because "it has been a large transfer. . (and) there 
are very many owners now in Russia." In contrast, another 
witness pointed out that, while Russia's experience has been 
quantitatively impressive, the economic figures mask the less 
positive qualitative features of privatization. He noted that 
"the promise of fair property distribution among the population 
was not being realized, and the inadequacies of the privatization 
program contributed iitportantly to the worsening of Russia's 
economy and to the political conflict." This week the Financial 
Times reported a deep crisis in Russia as output has plunged 25 
percent. According to the reported poll, a majority agreed that 
"privatization is legalized theft" and two-thirds of respondents 
believed that privatization was "undertaken for the benefit of 
nomenklatura and criminals." 

Similarly, the New York Times reported in October 1993 that 
privatization in Mexico has increased coitpetition among the 
handful of families bying to be Mexico's wealthiest clan. 
According to a quote in the report, "The booty of privatization 
has made multimillionaires of 13 families, while the rest of the 
population--some 80 million Mexicans--has been subjected to the 
same gradual iitpoverishment as though they had suffered through a 
war." While privatization income helped Mexico's Government 
service its debt, it also caused 400,000 Mexicans to lose their 
jobs. 

The United States and other Western governments have offered 
enthusiastic support for privatization efforts. But general 
observations of this nature must be coupled with a note of 
caution. Such caution is particularly inportant given what may 
be increasing skepticism about our own motives. In Russia, for 
instance, privatization policies have become linked in the minds 
of many with the United States because of U.S. officials' highly 
visible and public support for economic reforms. A number of 
Western advisors to the Russian Government, reported one hearing 
witness, are viewed by Russian citizens as representing U.S. and 
other Western business and commercial interests. In fact, in 
February this year, the Wall Street Journal reported that nearly 
50 to 90 percent of the money in any given U.S. aid contract 
directed to assist economic transformation in Russia comes back 
to the United States in the form of consultants' fees. Given the 
perceived link between reform and Western business interests, it 
is plausible to expect that the United States could share the 
blame for economic failures and dashed expectations that would 
result from a privatization effort not sufficiently driven by 
concerns for equity. 

Similarly, press reports this week announced enormous public 
disillusionment in Hungary with economic reform--and a resulting 



225 



nostalgia for communism that led to the former communists, now 
the Socialist Party, winning 33 percent of the first round in 
parliamentary elections. A similar resurgence of communist 
support has occurred in Poland and Lithuania. This is certainly 
not what U.S. policy on privatization has been trying to achieve. 

It is time for us to ask some probing questions about U.S. 
policy on privatization and how we implement it. In particular, 
we must assess whether we are giving adequate attention to 
analyzing the actual results of privatization efforts and 
determining who in these societies is benefiting. We must also 
determine who in the United States benefits from tax dollars 
going for privatization overseas, and whether such commercial 
concerns have too great an influence in the formation of our 
policy or nonpolicy. Our criteria for success and for failure 
must be made more explicit, and it is time to make any mid-course 
corrections in our policy efforts that are warranted. 

We are pleased this morning to welcome Administration 
witnesses who are knowledgeable about, and intimately involved 
with, privatization efforts worldwide. We will begin with 
Dr. Carol Lancaster, Deputy Administrator for the Agency for 
International Development. Next is Under Secretary of the 
Treasury for International Affairs Lawrence H, Siumers . 

We also welcome two Ambassadors from the Department of 
State: Ralph R. Johnson, Coordinator for East European 
Assistance, and Thomas W. Simons, Jr., Coordinator of U.S. 
Assistance to the New Independent States. We look forward to 
your presentations . 



226 



September 21, 1999 

House Banking Committee 

Russian Money Laundering 

Opening Statement Rep. Carolyn Maloney (D-NY) 



Thank you Mr. Chairman. 

Mr Chairman, the allegations of money laundering at the Bank of New York have again 
brought to view the serious challenges Russia faces in becoming a stable, peaceful participant in 
world affairs 

While the country has shed the inefficiencies of central planning, the prevalence of corrupt 
elements in Russian institutions continues to restrict true market reforms from taking hold. 

However, while a year ago the Russian economy resembled something of a black hole, 
limited signs of recovery are emerging 

The Russian Gross Domestic Product is showing signs of improving and the country is 
expected to have a trade surplus this year. Of course, these developments must be viewed in the 
proper context. They are the very small steps of a deeply troubled country. 

In the long term, this progress will be lost without the development of an enforceable legal 
framework In this context it is imperative that President Yeltsin and the Duma agree on a 
national money laundering statute. Major reforms are also needed in the nation's banking sector. 

Given the example that we are reviewing today, we in the US should likely review our 
own anti-money laundering safeguards Where were the U.S. bank regulators as billions of 
dollars were laundered through the Bank of New York? 

Chairman Leach, while the details of this ongoing investigation have not been fully 
revealed, the conduct of the Bank's regulator — the Federal Reserve — would appear to be a topic 
worthy of examination by this Committee. 

I look forward to hearing Secretary Summers' views on these issues as his important work 
in battling the Asian financial crisis makes him a most appropriate Treasury Secretary for this 
hearing. 

Thank you Mr. Chairman. 



227 



Opening Statement by Rep. Royce 

Hearing on Russian Money Laundering and the IMF 

U.S. House Banking and Finance Committee 

Tuesday, September 21, 1999 

Secretary Summers, I am glad to see you and I commend Chairman Leach for holding 
this timely and important hearing. What we are examining today is a very serious issue - 
one that goes to the heart of U.S. -Russia relations. It is worth noting, however, that 
Russian corruption and this Administration's response to that challenge, is not a new 
issue. 

In fact, three years ago, this committee held a hearing on organized crime in Russia and 
the threat to international banking systems. We heard from representatives of the Federal 
Reserve Board, the Financial Crimes Enforcement Network, the FBI, the Department of 
Justice, and recognized authorities on Russia. During that hearing, I brought up questions 
of extreme capital flight and accountability with respect to International Monetary Fund 
loans. Specifically, I raised concerns about the lack of money laundering laws in Russia 
and our inability to impose standards on foreign banking institutions. Further, I 
questioned what guarantees we had that billions of dollars in IMF and international loans 
to Russia reached their intended recipients and were not instead diverted outside the 
country by organized crime. 

Two years prior to that hearing, in 1994, 1 said, "Our aid to Russia should be conditioned 
on assurances from both Russia's government and our own, that all is being done that can 
be done in respect to monitoring and countering the growing threat of these crime 
syndicates before they can choke off the infant democratic experiment in the former 
Soviet Union. This is about countering a real threat to the chances for a successful 
transition in the former Soviet Union, and it is about stopping an international crime 
wave before it crests on our own shores." Five years and billions of dollars later, these 
questions may have risen to the level of scandal. 

Unfortunately, not much has been done in the last five years. IMF Managing Director 
Michel Camdessus recently said, "it is impossible to determine whether specific capital 
flows from Russia - legal or illegal - come from a particular inflow, such as IMF loans or 
export earnings." Apparently, once IMF funds are released to the Central Bank, there is 
no way of tracking where the money, in this case maybe $10 billion dollars, goes. 

American taxpayers deserve better. However, The New York Times recently reported that 
the Clinton Administration officials learned of allegations of Russian money laundering 
at the Bank of New York five months earlier than they previously acknowledged. Yet, 
the Administration continued to rally for more aid to Russia, even though they were fully 
aware that these funds were not reaching their intended recipients - the Russian people. 
Instead of making a genuine effort on critically needed structural reforms, the emphasis 
was placed on touting feel-good stories about dubious success in the Russian economy. 
So in the end, funds flowed to a Russia where corruption ran rampant, anti-money 



228 



laundering bills were vetoed by Boris Yeltsin, and politicians did little but throw up their 
hands and say, "Well, this is just the nature of Russia." 

What I am interested in finding out today is whether the Administration has, acquiesced 
to the cycle of corruption in Russia so it could claim reform in name only. Policies that 
turn a blind eye to real reform do irreparable damage to the process of democracy 
building. This does a tremendous disservice to the people of this country and to the 
people of Russia. 

I look forward to hearing from our witnesses today. 

### 



229 



Opening Statement by Representative Nydu M. VelAzquez 

Hearings on Russian Money Launduung and thb Bank of New York 
House Committee on Banking and Financial Services 

Sq>tember21, 1999 

Thaok you Mr. Chainnan. I would like to applaud you for holding thoae hearings in such 
a timely manner. It is important that we in Congress demonstrate that we are serious about 
stopping money laundering through our financial institutions. In this particular case, it is 
important that we determine whether or not aid given to Russia was diverted to Russian 
organized crime figures and eventually laundered through U.S. bunks. 

However, I would like to focus on another problem that the Bank of New York case 
highlights - that of money laundering and its relationship to drug dealing. In the United States 
alone, estimates put the amount of drug profits moving through our financial system as high as 
too bilhon dollars. As most of you on this Committee know. I have been working for more than 
five years to improve our nation's ability to combat money laundering. Money laundering 
provides the fbol for drug dealers and other criminals to ojierato and expand their activities, 
which can have a devastating social and economic consequences on our communities. 

Five years ago. my constituents came to me and demanded that something be done about 
the drugs and drug culture in their communities. That's why, in I99S. I brought together local 
and state law enforcement officials to discuss the efTects of money laundering and drug activity 
on New York residents. From this Working Group came the conclusion that 10 order to combat 
drugs, we needed to stop the flow of money to and from the drug dealers. 

From the insights provided by this coalition. I drafted the *^oney laundering and 
Financial Strategy Act," which was signed into law last year. This Act takes three important 
steps in combating money laundering. First, it authorizes fiinding to help state and local officials 
combat money laundering. Second, it establishes "High-Intensity Financial Crime Areas" (or 
"HIFCAs,") which will help concentrate the law enforcement resources in the areas where Otey 
are most needed. Finally, the Act mandates the Treasury Secretary to develop the first 
conqirehensive national Strategy to combat money laundering; 

The money lamidering Strategy mandated under the Act was due in February of diis year. 
I am pleased to announce to my cplleagues today that, through the hard wotk of Secretary 
Summers, the first compreheosive anti-monoy laundering Strategy in our nation's history is 
re«dy to be unveiled. In fhct, the Treasury Department was ready to deliver the Strategy to 
Congress at tbe end of last week, but I asked that it be pos^ned because Members were out of 
town as a resalt of Huzrieane Floyd. 



230 



Pint of all. I would Ulce to congratulate Secretaiy Summers for bit hard work on the 
strategy. From the begiimiog. he has shown that this Strategy is a priority fat hla Administration. 
I would also like to thank Deputy Secretary Eizenstat. Undersecretary Jim Johnson, Deputy 
Assistant Secretary David Medina, and Chief Counsel Steven Kroll. 

I want to take thia opportunity to offer my sincere appreciation to my colleagues on this 
Committee who supported my legislation and fought for it as if it were their owil I especially 
want to thank Chairman Leach, Ranking Member LaFalcc. and Rqiresentatives Roukema, 
Bachua. and King. 

I have had the chance to make a preliminary review the document, and have determined 
that the Strategy meets the requirements established under the Act. Although not perfiBct. the 
strategy is an imjxirtant step in the right direction. And, ss many of you know, the second annua] 
Strategy i« due in February of 2000, so we will have the opportunity to weigh-in with Treasury 
and have the Strategy improved over the next few months. 

These hearings and the current investigation of several Bank of New York accounts 
highlight the need for a comprehensive anti-money laundering Strategy and dononstrate sevenl 
important weakness in America's current anti-money laundering aystem. 

One of the weaknesaes in the current system is the Isck of cooperation - both from the 
standpoint of local, state, and federal law enforcement cooperation, and from the standpoint of 
cooperation between the fnuncisl institutions ud bw enfisrcement officials. 

Jn this case, the Bank of Now Yoik did not file a "Suspicious Activity Report" until after 
the Justice Department had subpoenaed account records. Had Bank of New York officials been 
diligent in filing the required reports, federal law enforcement o£Bcials would have had die 
opportunity to act more qniddy. 

In order for money lamtdering detection to work in die United Statea, there must be 
cooperation between banka and law enforcement offldala. In most money laundering cases, the 
banks are in the best poaition to know if illegal activities are taking place. 

The anti-money laundering strategy addresses those issues and has listed among its 
priorities enhancing the regulatory an cooperative efforta between firumcial institutiona and law 
enforcement oCQciala, and die strengthening of cooperative effiirts between atate, local and 
federal law enforcement officials. 

Another problem with our current efforts against monqy latmdering ia the undenitiUzatiao 
ofour current resourcea, which often leads to doplicatioii and inefficiency. Many times State and 
local law enforcemettf offiolala do not utilize the reaouroes diat are available to tiiam through the 
various federal agenoiea. (n sdditkm, (bderal law enforoemant agents frequently do not otilice all 



231 



of the federal reaounea at their dUspoaal. In fact, • 1998 OAO ropoit' found that 24% of the 
fbdenl field agenta auiveyed were not even aware of the anti-naoncy laundering products and 
•crvices offered through the Financial Crimes Enforcement Network ("FinCEN"). 

Becauaa the current federal anti-raoney iMWidering ofBces are apread out through varioua 
agencies of the federal government, state, local, and even federal law enlbroement agenta are 
unaware of how tfiese programs should interact, and. as a result, the current potentiol of our 
nations law enforcement agencies ability to combat money laundering remains untapped. 

One of the objectives of the Strategy ia to define the roles of each law enforcement 
agency in the fight against money laundering; provide an outline as to how those agencies are to 
cooperate, intenct, and avoid duplication; and to ensure that every agency ~ whether state, local 
or federal - is aware of the resources provided by other agencies. 

However, the most important aspect of the Strategy may simply be the development of a 
comprehensive national policy. For the first time, the Strategy puts in writing the goals for our 
fight against money laundering, and. more importantly, how the various federal agencies charged 
with fighting money laundering should woiic together to reach these goals. This will help, not 
only in the utilization of existing resources, but also will give the law enforcement community 
focus in its battle against money laundering. 

The Strategy should be seen as a blue print for building a coherent and effective anti- 
money laimdering force. Without such a plan, the coordination of the various agencies would bo 
impossible - which is reflected in the current lack of a coherent policy. Much like trying to build 
a house without a blue print - it does not matter how effective your workers are if they are not ail 
woriang from the same plan. 

Thank you again Mr. Chatmian, and I look forward to hearing from our witnesses. 



' "Mogoey Laundering: PinCEN's Law Enforcement Role Is Evolvtng," p. 25; June 1998. 



232 



Canereuwanian Maxhkc Wtttrs* SttttoiMt 

Sepunber 21, 1999 

House Banking and Financial Services Couunince 

Bank of Neir York Money Laundering Hearing 

I am not ai all shocked that we have to convene once again to address ifac most serious 
Issue of money lyiwH^ring ja UniTcd States financial ic«iaidons. As many of your know, I have 
woriced v«9cy hard on the money laundering issue, particularly as it relates lo dmg tnflicking. I 
was an original cosponsor of HR. 400S, the "Money Laundering Dctenence Act of 199$* and bad 
tauT amendments which were included in ihs bill. 

I spoke in opposition to the Chicorp/Travdcrs merger due to the ongoing Depamnent of 
Justice investigation into money laundering and oth«r potential financial crimes involving Raul 
Salinas and Citibank. I've held press conferences and sent numerous letters to the Department of 
Justice, the United States President, and Memben of the House Banking and Financial Services 
Committee. I have appctnd on television shows and spoke on radio progranis to discuss money 
laundeiing, drug trafficking, and their devastating impact on America's oomsnunities. 

Last year, I inttoduced legislatioo to include money laundering as a priority when the 
Federal Reseve considers bank ^>pl)cations for merged or acquisitions and I have recently 
introduced the "Integri^ in Banking and Money Laundering Prevention Act of 1999" to help 
eliminate money laundering in the banking industry. 

The House Banking and Financial Services CommitiM has not done enough to ensure 
diat our fitumeial institutions are free from abuse by alleged drug tiaSldoets such as Semyon 
Mogilovich, one of the leading figures in the investigation of money laundering at the Bimk of 
New York. My remarks today will fitcus on three problems with our cuirent anti-ffloney 
laundering laws and legislative solutions to each. 

Law enforcement officials have stated that one of the biggest problems they encounter in 
money laundolng investigations, panicularly where there is as intemaiional flow of fbnds such 
as the case where money flows from Russia through offshore accounts and then inn> accoums in 
the United States, is the inability to reconstruct an audit trail for piosecutton purposes. This was 
a major obstacle in the case of Raul Salinas and is an obstacle for law enforcemcDt in the present 
money laundering scandal. I have identified two areas that should be addressed to aid law 
■nfbrcement in money laundering investigarions. The first is prtipo^ maintenance of 
concentxaiion accounts and Ute second is adequate documentation of die beneficial owner of 
offihore accounts. 

ConcennBiion aeoounta are business accounts majntained by a financial institution in 
which funds fiom various sources are commingled. In July 1 997, the Federal Reserve Bank of 
New York issued "sound practice guidelines" thai highlighted concentration accounts as a 
weakness in money laundering controls. The federal Reserve reported thai ooncennation 



233 



acoouDts could "mask unusual iransaciioos and fksws* making it nearly impossible to ntablish 
The ownership of all fiuub in a single acooum 

During last year's money laundsnng hearings on 
HR 4005 I asked Heiben A. Biem, a witness from the Federal Reserve's Board of Govenwrs 
Division of Banking Supervisoit. about the potentiaJ for money laundenng through conceon^on 
accounts. He stated that banking oiganizaoons should make sure that ihey have clcmr records 
about f\md sansfers and if banks want to use a concentration account, also called a suspense, or 
omnibus account, then they should keep proper records. My legislative proposal would require 
that banks who use concentration accounts maintain all accounts in such a way as to ensure that 
the name of ihe account bolder and the number of the account are associated with an account 
activity of the account bolder This requirement will aid law enforcement and help lo protect 
banks fiom money laundering abuses. 

Similar attention must be paid to ofTshore accounts. Ofishore accounts are havens for 
money laundeners and drug traffidceis. In die case of Raul Salinas, a phony ofEshore company 
named Trocca was set up which allowed Salinas to hide the flow of illegal drug money, hi the 
present cose, one of the key accounts chit)ugh which money is suspected of bebg laundered 
bek>ngs to a company called Benex, which invesiigaton believe filtered money &r Semyon 
Mogilovich, the alleged kingpin of Russian organized crime According to investigators, it is 
likely to take months before they can sift throu^ the documents and penetrate the complex web 
of oflishore companies and holding companies to determine precisely where the money came 
from and where it went. My legislation would aid law enforcemem efforts by requiring 
enhanced recordkeeping of the beneficiai owners of such of&hone accounts. 

Finally, I want to address the penalties assessed against banks convicted of money 
laundering. During an April 15, 1999 hearing on trends in money laundering, I asked a 
Depanmem of Justice witness how many United States or foreign depository instJTutions had lost 
their charter as a result of a conviction, or a civil penalty imposed for money laundenng. The 
response I received fiom the U. S. Depanmeni of Justice is that " no U S or fbr«pn d^posJioTy 
insdnirion has lost ha license as a result of money launderint^ activities in the United Staiy^ " My 
legislation would give courts the ability to double the sentence against persons and insrimiians 
thai violate United States anti-money laundering laws with rcspea to foreign high-intensity 
money laundering aivas. 

If we do not have the courage to addiess ibe practices of our financial instiiutionj the 
money laundering abuses will only get woise. 



234 



EMBARGOED UNTIL 10:00am EDT 
Text as prepared for Delivery 
September 2 1,1999 



Treasury Secretary Lawrence H. Summers 
Testimony before the House Banking Committee 



Chairman Leach, Ranking Member LaFalce, Members of the Committee, I welcome this 
opportunity to discuss our financial policies towards Russia in light of recent reports and 
allegations regarding corruption, capital flight, and money laundering. Given the crucial law 
enforcement challenges these issues pose, and given our significant national security and 
economic interests in Russia, it is certainly timely for this Committee to hold a hearing on these 
matters. 

Let me say at the outset, in the wake of recent allegations of money laundering through a U.S. 
bank, that safeguarding the integrity of the American fmancial system is an absolute priority for 
this Administration. We are committed to the fiill investigation of these allegations, to the 
prosecution of any crimes uncovered, and to strengthening our capacity to combat future abuses. 
We will continue to press Russia and other coimtries to put in place the laws and enforcement 
capacity to combat money laundering and other cross-border crimes. 

I would like to cover four topics in my remarks this morning: first, the broad context of our 
economic and financial engagement with Russia; second, Russian corruption, capital flight, and 
international money laundering; third, our financial poUcy towards Russia going forward; and 
fourth, our policies generally to combat global corruption and money laundering. 



I. Russia's Economic Transition and American Engagement 

It would be difficult to overestimate the seriousness of the problems facing Russia today in the 
wake of the monetary and financial coUs^se of Augxist 1998 - a colls^se that was itself the 
consequence of long-standing Russian failures to finally establish and implement comprehensive 



235 



reforms against the background of a deterioration in the international economic environment. 
These difficulties are of grave concern to the United States and will shape the terms of our 
engagement with Russia in the months ahead. But even as we recognize the enormity of 
Russia's problems, it is important to see them in their broader context. 

After the collapse of the Soviet Union in 1991, Russia faced four difficuh transitions: the 
transition from empire to state; the transition from totalitarianism to democracy; the transition 
from the law of force to the force of law; and the transition from a command economy to a 
market economy. The American people had then, and continue to have, an enormous stake in 
Russia's making these transitions peacefully and successfully: 

• It is a stake that derives from our national security interests, made all the more important by 
the large number of nuclear weapons that remain on Russian soil. 

• It is a stake that derives from our interest in a strong and stable global economy and 
international financial system in which Russia becomes a healthy participant. 

• And it is a stake that derives from our interest in protecting the integrity of our markets and 
our financial institutions from the scourge of corruption and money laundering - be it in 
Russia or any other country. 

The United States has pursued these critical interests bilaterally in a number of ways: through 
far-reaching arms control and military cooperation with Russia; through extensive formal and 
informal mechanisms and contacts; through bilateral aid programs; and through direct linkages 
between American and Russian law enforcement agencies. 

Along with technical assistance, the aspect of Russia's transformation in which the Treasury 
Department has been, and continues to be, most heavily involved is Russia's interaction with the 
international financial institutions. We have supported that interaction because of our 
assessment of the strong U.S. interest in Russia's constructive evolution. 

Conditioned financial support 

From the start, the overarching economic objective of the international financial institutions in 
their operations in Russia has been to help Russia develop the policies and institutions of a 
functioning market economy as the route to stability and growth, an objective that the United 
States has supported as the major shareholder in these institutions. Economic instability in 
Russia raises important concerns for our national security, given Russia's pivotal and continuing 
role with respect to nuclear security, the battle against terrorism, the stability of Eurasia, and 
conflict resolution in global hot spots like the Balkans. 

The crucial tool of the international financial institutions to support economic reform in Russia 
has been conditioned finance. At every step, we have been clear-headed in endeavoring to strike 
a careful balance: 

• Between conditionality that requires what is best economically and is also politically 



236 



realistic. 

• Between the desire to effect meaningful reform and the need to avoid excessive intrusion in 
decisions that Russia must ultimately embrace for itself 

• Between the goal of creating investor confidence in Russia and attracting foreign capital and 
the need to avoid moral hazard problems that would result from large amounts of 
unconditional finance. 

• Betwreen the goal of dismantling the apparatus of communism and the need to cushion the 
impacts of the process of change. 

Our support for official financing for Russia has been grounded in the application of 
conditionality and in the recognition that we cannot want successfiil market reform in Russia 
more than Russia's government and its people do. America's interest lies in making reasonable, 
informed judgments on what we believe to be the right direction for Russia, and in conveying 
these views clearly to Russia's government and its people. 

Providing assistance in a way that puts the integrity of the international financial institutions at 
risk serves neither American interests, nor those of Russia or the international community. It is 
critical that countries respect the conditions of programs reached through negotiations with the 
International Monetary Fund or Worid Bank. The IMF and World Bank must hold Russia 
accountable for its performance, both in implementing agreed-upon policy actions and in 
ensuring that multilateral financing is used for its intended purposes. 

A review of the record of lending to Russia by the IMF and World Bank shows that these 
institutions have tailored their support to the circumstances. For example, in 1996, the IMF took 
the then-unprecedented step of introducing monthly monitoring of Russian policy performance 
in its 1996 program. In addition, the IMF withheld financing when previously agreed-upon 
conditions were not met. 

• In 1 996, monthly IMF tranches were delayed eight times, including twice before the summer 
elections, and two tranches were never disbursed. 

• Under Russia's 1996-97 EFF program, actual disbursements were $1 .6 billion, or 28%, less 
than originally planned because of shortcomings in Russian policy performance. 

• After the August 1 998 monetary and financial colls^se, the IMF ceased lending to Russia for 
a year imtil Russia began implementing a new economic program focused on restoring 
financial stability. 

Similar failures to follow through on policy commitments have also constrained World Bank 
lending to Russia. 

Russia 's record since 1992 



237 



No one, here in the United States and certainly in Russia, can be satisfied with developments in 
Russia during the past decade. Growth has been stagnant, corruption has been all too prevalent, 
and a law-based market economy has not been established. Since August 1998, Russia has 
struggled, albeit with more success than most expected, to avoid the perils of hyperinflation and 
economic collapse. There have been some positive signs; for example, industrial production in 
August was 16% above its level a year ago. But the fact remains that the Russian government 
has failed to implement some of the most basic and critical reforms, and enormous challenges 
remain. 

At the same time, the record also demonstrates that Russia today is in many ways a very different 
country than it was a decade ago: 

• Russian nuclear weapons are no longer targeted at our cities; 1,500 nuclear warheads have 
been deactivated, and over 300 bombers, silos, and launchers have been destroyed. 

• Russian military spending has dropped dramatically in real terms to about one tenth of its 
Soviet-era peak in 1988; Russian troops have been withdrawn from the Baltics and Eastem 
Europe; and Russians are working side-by-side with NATO in the Balkans. 

• Russia is now more open; Russians can learn what happens in the markets and societies 
beyond their borders, have access to the ideas and products that the world has to offer, and 
have imprecedented personal freedoms, even if the capacity to exercise civil liberties is far 
fix)m perfect. 

• With 70% of the Russian economy's output now generated by the private sector, the 
communist system has been essentially dismantled and the state's tentacles of central control 
have been largely dislodged. 

• Economic distortions created by energy prices that were once held far below world prices 
and the easy availability of subsidized credits have been greatly reduced. 

Russia's perfoimance reflects the policies that Russia has chosen. If not all our goals for Russia 
have been fulfilled, it is certainly equally true that not all the fears for Russia that were common 
a decade ago - or even a year ago - have materialized. 

As we look at the current envirorunent in Russia, we must be aware that Russia will shape its 
own destiny. What is most constructive going forward is a focus on pursuing policies toward 
Russia based on our national interests. 

n. Corruption, Capital Flight, and International Money Laundering in Russia 

Mr. Chairman, let me turn now to the separate, though often interlocking, issues of corruption, 
capital flight, and international money laundering, which have been critically important to our 
policy toward Russia for many years. Our longstanding concern about these problems has only 
been further underlined by the recent investigations. 



238 



Corruption 

Corruption is a problem of great concern for the United States, whether in Russia or elsewhere in 
the world. Those who disobey Russian laws are unlikely to demonstrate any more deference to 
the laws of the United States or any other country. This gives us a deep interest in doing as 
much as we feasibly can to encourage the development of a fully functioning rule of law in 
Russia. 

To be sure, Russia inherited profound corruption problems from the Soviet era. In the 1980s and 
early 1990s, for example, the Soviet system allowed the elite to profit from its access to cheap 
commodities and credits and to foreign markets. As Anders Aslund has pointed out, in 1 990 the 
state-controlled price of a ton of crude oil was the same as the free-market price of a pack of 
Marlboros in Moscow. This distortion created opportunities for quick fortimes to be made by 
those able to purchase oil domestically and resell it overseas. Aslund has estimated that at least 
79 percent of GDP was lost in this type of distortion in 1992. These flaws in the economic 
system that Russia inherited from the Soviet Union explain why a crucial piece of our efforts to 
combat corruption in Russia has been to push for the elimination of subsidies and price controls. 
An equally important concern has been Russia's failure to establish the rule of law and the 
inability of Russians to rely on a fair enforcement of laws and contracts. In policies toward 
public and private enterprises, in the collection of taxes, and in the formulation and 
implementation of banking regulation, there have been far too many instances of corruption in 
which private interests, rather than the public interest, have been protected. 

A particularly problematic result of Russia's failure to establish the rule of law and a credible 
law enforcement system has been the growth of organized crime during the past decade. Russian 
organized crime has emerged as a powerful corrupting force - a force that challenges Russia's 
political and economic development. It has also become a global threat, one that poses a 
challenge to the integrity of our financial system. Clearly our efforts to combat the activities of 
Russian organized crime here in the United States would be bolstered by substantial progress in 
the establishment of the rule of law in Russia. 

The fu-st phase of Russia's privatization process was directed principally at dismantling the 
mechanisms of the failed centrally planned economy. Although it is reasonable to debate the 
specifics of that program, there is broad agreement that it accomplished its objective. Much 
more serious questions about a lack of transparency and competition surround a later phase of 
privatization, the Russian government's so-called "loans-for-shares" program. We shared those 
concerns. As early as April 1995, several months before the deals ultimately took place, the U.S. 
Executive Director at the IMF detailed our strong misgivings regarding such transactions and 
emphasized the need for transparency and competition in the privatization process. The 
international financial institutions also expressed profound concerns. 

The Clinton Administration has consistently urged the Russian government to combat corruption 
through structural and institutional reforms and the rule of law. President Clinton made clear our 
concerns in strong public statements in Moscow in 1995, as well as subsequently. As the 
President said to Russian Prime Minister Putin in a meeting 10 days ago, corruption and money 
laundering "could eat the heart out of Russian society" unless the government acts aggressively 



239 



to combat these problems. That is why, for example, we have repeatedly encouraged Russia to 
adopt a simpler, more efficient tax code and to enforce the collection of taxes - a process that is 
at present woefully inadequate and subject to rampant corruption. 

In addition, we have regularly supported placing specific conditions, aimed at reducing 
corruption and strengthening Russia's economic and legal system, on loans to Russia by 
international financial institutions. 

These conditions have included: 

• Tax systems designed to reduce bribery and tax evasion by politically well-connected energy 
companies and other large firms. 

• The elimination of tax offsets - for example, trading tax payments for payments for goods 
and services - which act as a major contributor to corruption, lack of budgetary discipline, 
and tax evasion. 

• The creation of a Russian treasury and budgetary control system to cut expenditure leakages 
for corrupt purposes. 

• The decontrolling of prices to eliminate corrupt, bribe-ridden distribution systems and reduce 
enormously costly insider arbitrage opportunities, in which traders buy commodities at low 
controlled prices and sell them abroad at higher market prices. 



• 



• 



The reduction of subsidies, which have destroyed budget discipline and created additional 
insider arbitrage opportunities. 

Trade liberalization to introduce more foreign competition and, thereby, reduce monopoly 
power and opportunities for corruption. 



• Reductions in government wage and pension arrears. 

• Better bankruptcy laws and improved enforcement to reduce asset stripping and induce the 
honoring of contracts. 

• The strengthening of minority shareholder rights to avert deals that benefit insiders at the 
expense of the rest. 

Capital/light 

If corruption is often indicative of a vote of "no confidence" in a state's capacity to establish and 
enforce the rule of law, capital flight is a vote of "no confidence" in a country's economic 
policies. Much of the enormous flight of capital out of Russia reflects Russians' lack of 
confidence in the ruble, in the banking system, in the economic consequences of political 
uncertainty, and in the capacity and willingness of the government and the parliament to work 
together to implement the structural reforms necessary to build a strong economy. 



240 



The most obvious manifestation of this lack of confidence is the $35-40 billion in U.S. currency 
that is estimated to lie outside the financial system, largely beneath Russian mattresses. During 
the transition period, capital flight has drained perhaps $15 biUion a year fi-om the Russian 
economy. Russia's current account surplus may reach 8 percent of GDP this year, yet foreign 
exchange reserves remain low, and the country has fallen behind on a substantial part of its 
external financial obligations. The simple explanation for this phenomenon is the withdrawal of 
capital from Russia. 

History teaches us that the best way to stem capital flight and encourage money to return is to 
create a healthy business environment, one that provides the sorts of investment opportunities 
that will attract capital back. That is why we have pressed, and will continue to press, Russia - 
both through our own bilateral interactions and through the IMF and other international financial 
institutions - to implement policies that support competition; tax reform; improved corporate 
governance; greater transparency and disclosure in the private and public sectors; stronger bank 
supervision; and restraints on the discretion and scope of government regulation. 

International money laundering 

Money laundering requires neither official corruption nor capital flight. However, the three 
often come together where the rule of law is weak and confidence in the economy is low. 
Money laundering is the process of converting ill-gotten gains into "usable" funds by routing it 
through what appear to be legitimate transactions. Money laundering is therefore predicated on a 
previous crime. Money laundering through cross-border transactions can become part of capital 
flight. 

Wherever it occurs, international money laundering poses a threat to the integrity of financial 
institutions both here and abroad. The current allegations involving money laundering through 
major American financial institutions have only reinforced our recognition that widespread 
corruption in another country can pose a significant danger to our interests. 

In this context, a test of Russia's seriousness in its effort to combat its money laundering 
problems will be its ability to establish an adequate legal framework and implement effective 
enforcement mechanisms. To fiirther this effort. Treasury has been assisting Russian authorities 
to enact and implement effective anti-money laundering programs. For instance, Treasury has 
actively participated in bilateral training and technical assistance programs to help Russia build 
its anti-corruption and anti-money laundering infrastructure. Treasury has also participated in 
the work of die G-8 Lyon Group of law enforcement experts, in connection with that group's 
project to identify and pursue Russian and Eastern European organized crime groups. A team of 
Russian law enforcement officials visited Washington last week and met with officials from the 
Justice Department, the State Department, and many parts of the Treasury Department, including 
the Internal Revenue Service, the Customs Service, the Financial Crimes Enforcement Network 
(FinCEN) and the Secret Service, as well as other government agencies, to discuss money 
laundering issues. The Russian ofBcials also met with of^cials from the Federal Reserve to 
discuss banking supervision and regulation. Such dialogue represents a step in the right 
direction, but it must be followed up with concrete actions. 



241 



Administration officials have urged the Russian government to pass comprehensive anti-money 
laundering legislation. We have stated publicly that President Yeltsin should not have vetoed 
such legislation. In a telephone conversation earlier this month, President Clinton stressed to 
President Yeltsin the importance of swiftly designing and enacting a strong anti-money 
laundering law. President Yeltsin assured President Clinton that this was indeed his intent. In 
the context of ongoing IMF engagement with Russia, the United States and other major IMF 
shareholders will be monitoring developments in this area closely. 

III. Our Financial Policy Toward Russia 

Following the economic and financial collapse of August 1 998, Russian economic policy and our 
own financial policy toward Russia moved to a very different phase. The International Monetary 
Fund ceased lending to Russia and did not provide any financial assistance for about a year. 

Our interaction with Russia through the international financial institutions, however, is only part 
of our efforts to promote stability, economic progress, and Russia's integration into the global 
economic and political systems. Certainly it is in our interest to remain engaged with the 
Russian people. 

The United States is continuing to help the Russian people develop democratic and legal 
institutions, start private businesses, and improve social services. We have supported the 
development of NGOs; of the 65,000 NGOs that have been created during the past decade, 
US AID programs have supported more than 15%. The Department of Commerce and US AID 
are assisting thousands of small and microbusinesses through a variety of programs, including 
loan programs. And through USAID-sponsored programs, we are training thousands of doctors 
and nurses and helping Russia improve drug therapy and care for diabetics, a disease that 
currently affects seven million people in Russia. 

The technical assistance we provide Russia has long emphasized building the legal and 
regulatory infi-astructure necessary for a market economy. Treasury technical assistance has 
focused in particular on the essential task of constructing a fair, predictable, law-based federal 
tax system. As part of a broad array of efforts to strengthen the rule of law, US AID has worked 
to promote judicial independence and ethics, providing training for close to a thousand judges 
and court personnel. 

A new approach to financial assistance after 1998 

In the difficult environment that has resulted from Russia's economic collapse in August of last 
year, the approach of the international financial institutions with the support of the G-7 has 
shifted fi-om providing net new fimds to Russia in order to promote economic reform to partially 
refinancing debt coming due to the IMF as part of an attempt to support economic stability in 
Russia. We and the international financial institutions have insisted that their support be based 
on adequate accounting and adequate safeguards. 

The IMF program approved in July 1999 was very different from all of Russia's prior IMF 



242 



programs. The first disbursement under the new IMF program - as well as any subsequent 
disbursements - was predicated on the imposition of new safeguards to protect the use of that 
money. The fiinds were provided in the form of Special Drawing Rights, were paid into an 
account at the IMF, and can be used only to repay Russian obligations to the Fund. In addition, 
approval of the program required a satisfactory independent investigation of the Russian Central 
Bank's investment in Fimaco and of the July 1998 IMF disbursement. 

Our decision to support this new program for Russia - as has been true of all of our policies 
toward Russia since 1993 - involved a difficult balance: between the need for engagement and 
the need for conditionality; and between what was economically necessary for Russia and what 
was politically feasible. Going forward, it will be as important as ever that we remain 
hardheaded and clear-eyed, and ensure that any support that is provided for Russia is used for its 
intended purpose and for that purpose alone. 

Russia's new IMF program will be complemented by limited and measured support through 
fmancing from the World Bank and the European Bank for Reconstruction and Development for 
particular projects and targeted reform efforts. As in the past, any lending will depend on 
Russia's adherence to the conditions of these programs. Last summer, the World Bank 
restructured its three key structural adjustment loans to Russia to encourage greater progress 
toward reforms in the financial and coal sectors and in the country's pension and welfare 
systems. It also canceled parts of other loans amounting to $228 million because of poor 
performance, largely as a result of the fmancial crisis. This measured approach has also 
informed our support for a rescheduling of Russia's bilateral Paris Club Soviet-era debt that is 
limited both in scope and duration. 

Under the new IMF agreement, Russia is to repay about $2 billion of its obligations to the IMF, 
and is refinancing the remaining $4.5 billion coming due during the program period. This will 
have the consequence of reducing Russia's debt to the IMF as Russia meets its obligations. 
Accounting for all the operations of the international financial institutions, there will be a net 
financial flow fi-om Russia to the international financial institutions as a group between July 
1999 and December 2000. 

Loans conditioned by adequate accounting and adequate safeguards 

Our continued support for IMF or World Bank engagement with Russia is predicated on Russia's 
compliance with crucial conditions to ensure financial integrity and to safeguard any assistance 
provided in refinancing. These include: 

• The completion of an investigative report on ail offshore operations of the Central Bank of 
Russia. 

• Procedures at the Central Bank of Russia (CBR) to strengthen internal controls on the 
management of reserves, exchange market intervention, and extension of credit to 
commercial banks. Each disbursement of IMF financing will be conditional on a 
determination that the CBR's reserve management since the prior disbursement has been 
appropriate. 



243 



• A regime of regular external audits of the CBR that are reviewed by the IMF. These audits 
should be made public. 

• New procedures to strengthen safeguards on the use of the resources of the international 
financial institutions for budgetary support. 

These conditions and considerations will govern our support of additional disbursements to 
Russia from the IMF and World Bank. 

We have supported continued IMF engagement with Russia, based on these safeguards, not 
because we expected that Russia would be rapidly transformed into a market economy or that 
corruption would be eliminated overnight, but rather on the view that to quarantine, contain, or 
write off Russia as too corrupt would ill serve our national interest. Acting on that view would 
limit our ability to support Russian economic and fmancial stability; it would inhibit our ability 
to promote democratization; and it would raise the risk that the United States and the West would 
be labeled as scapegoats for Russia's failure to address its problems. 

rv. Combating Global Corruption and Money Laundering 

Finally, as we work to promote the adoption of sound economic reforms in Russia and in other 
countries aroimd the world, fighting corruption and pursuing policies to reduce crime will be 
essential components of those efforts. We will pursue these measures, as we have done in the 
past, both through our bilateral relationships and within multinational organizations. 

For example, building on the U.S.-led efforts to conclude the OECD Anti-Bribery Convention 
and the Vice President's Anti-Corruption conference last February, we have been pressing, and 
will continue to press, for the complete ratification and implementation of the OECD Convention 
by all signatories. In addition, the United States is working with its G-7 partners and others to 
coordinate anti-corruption efforts and assistance, complete a WTO agreement on transparency in 
government procurement, and seek ways to institutionalize international measures to identify, 
block and seize illicit funds gained through criminal acts. 

Anti-corruption initiatives within the international financial institutions 

The IMF is increasingly giving explicit consideration to addressing weak governance and 
corruption in all its country programs. The Fimd has developed a code of fiscal transparency, 
which calls for governments to accurately track and disclose expenditures and thereby make 
them more accountable for their spending decisions. It has also consistently supported open and 
transparent markets, price decontrol, and trade liberalization, each of which will reduce the 
opportunity for bribery and corruption. 

The IMF's approach to its 1997 programs with Thailand, Korea, and Indonesia included 
provisions aimed at reducing "crony capitalism," and other forms of corruption. For example, in 
the case of the Reforestation Fund in Indonesia, used by former President Suharto and his 
colleagues for inappropriate purposes, the IMF required that the Reforestation Fund be 



244 



accounted for as part of the national budget, and required a full audit by internationally 
acceptable experts that is to be published upon its completion this fall. More recently, the IMF 
has suspended funding to Indonesia in connection with accusations of corruption relating to 
Bank Bali. 

The World Bank, with the strong support of the United States, is also paying increased attention 
to the problems of corruption in its member countries. The Bank has developed programs to 
combat corruption problems in individual countries, initiatives to enhance transparency and 
accountability in public finances, and approaches to strengthen public institutions and the rule of 
law with regard to investment and property. The Bank has also developed new methodologies 
and techniques for analysis of the nature and extent of corruption in specific countries. 

Since 1 996, more than two dozen countries in East Asia, Eastern Europe, Latin America, and 
Afiica have sought the Bank's assistance in anti-corruption work. Specific country programs 
include: technical assistance for procurement reform in Tajikistan and Lebanon; anti-corruption 
seminars in Georgia, Ghana, India and Korea; Supreme Court modernization in Venezuela; and 
educational workshops to improve public expenditure management in Gambia. 

In the IDA- 12 replenishment agreement, the United States led the effort to include a 
strengthened linkage between new lending and borrower performance, with explicit 
consideration to be given to good governance and efforts to combat corruption. IDA- 12 also 
requires the World Bank and its borrowers to undertake public expenditure reviews, procurement 
assessments and financial capacity assessments and to identify follow-up actions. The United 
States will also continue to urge the Multilateral Development Banks to give priority attention to 
developing uniform procurement rules and documents which can help countries combat 
corruption and decrease opportunities for corruption in World Bank and regional development 
bank projects. 

Going forward, these issues will be the focus of attention and the international meetings over the 
next ten days. We and the G-7 will be calling for authoritative reviews by the IMF and the 
World Bank to identify ways to strengthen safeguards on the use of IMF and World Bank funds, 
especially in cases where there is heightened risk of diversion or misappropriation of funds. 

National Money Laundering Strategy 

This Thursday, the Treasury Department and the Justice Department will release the 
Administration's first National Money Laundering Strategy report. The Strategy will set forth a 
broad-based domestic and international program to combat money laundering, including several 
dozen proposed action items aimed at bolstering international cooperation in the fight against 
money laundering; strengthening domestic enforcement; enhancing the regulation of banks and 
other financial institutions; and building stronger partnerships with state and local governments. 

The Strategy will contain a series of recommendations intended to combat the types of criminal 
activity we are discussing here today. For example, it calls for legislation to make U.S. money 
laundering laws applicable to a broader range of international criminals - including corrupt 
foreign officials. It calls for rules to extend requirements for filing suspicious activity reports 



245 



(SARs) to money service businesses, broker/dealers and casinos, as well as enhanced use and 
analysis of SARs by Treasury's Financial Crimes Enforcement Network and other federal law 
enforcement agencies. The Strategy calls for designating high-risk money laundering zones 
toward which to direct coordinated law enforcement efforts. And it proposes that we intensify 
pressure on nations that lack adequate counter-money laundering controls to adopt them. 

The implementation of these recommendations will take time, but with hundreds of billions of 
dollars laundered each year, it is clear that we must make long-term commitments while moving 
forward quickly. 

V. Concluding Remarks 

Mr. Chairman, during the past six and a half years we have faced very difficult choices with 
respect to Russia even as we have sought to intensify our efforts to combat global corruption and 
money laundering. There are clearly no simple answers on how best to support perhaps the most 
complex economic transformation of our time, and the process of change in Russia is still 
ongoing. In many respects, the challenge has been to find the best economic policy when 
confi'onted with difficult choices. The difficulty of those choices has hardly diminished in the 
wake of developments that have taken place in Russia since August 1998. As I have described, 
since the economic and financial collapse at that time, the financial aspect of our engagement 
with Russia has been pursued on very different terms and with much constrained objectives. The 
present program, built around the very rigorous safegiiards that restrict how Russia can use any 
financing that the IMF makes available, implies a continued reduction in Russian debt to the 
IMF. 

It has always been clear that Russia's complex transformation fi-om a centrally planned 
communist empire to a democratic market-based economy would take a great deal of time. And 
it has been equally clear that the United States has a great stake in the success of this process. As 
Russia's transformation proceeds, we will need to continually assess and adjust our strategy in 
light of our interests as events in Russia evolve. Discussions like the one we are having here 
today will be important to help guide our thinking on this crucial national issue as Russia's 
transition continues. 

Thank you. I would now welcome the Committee's questions. 

-30- 



246 



U.S. House of Representatives 

Committee on Banking and Financial Services 

September 2 1,1999 

Hearing on Russian Money Laundering 

R. James Woolsey 

Shea & Gardner 



Mr. Chairman and Members of the Conmiittee, it is an honor to be asked to testify today 
on this important subject. 

I should begin by ensuring that you realize that my detailed knowledge of this particular 
issue is dated, limited in scope, and was highly classified at the time I was working on it several 
years ago because of the sources and methods we used in learning about it. My involvement 
arose because, during 1993, when I was Director of Central Intelligence, some very able CIA 
analysts came to me with an excellent briefing on some aspects of Russian organized crime. 

I moved promptly to ensure that very senior officials at the Justice Department, the FBI, 
the National Security Council, and other relevant agencies received this briefing. In several of 
these cases - 1 remember briefings at Justice and the NSC - 1 personally attended in order to 
highlight the importance of the subject and to emphasize the excellence and the creativity of the 
CIA officers' work. 

I then commissioned a special National Intelligence Estimate on Russian organized 
crime. Because of the sensitivity of the sources and methods involved, distribution of this 
Estimate was quite limited. 

I also put this issue on the agenda of some of the Intelligence Community's most 
sensitive meetings on intelligence matters with some of our closest allies, and ensured that at a 
very senior level they were appropriately briefed as well. 

I believe that through these steps the U.S. Intelligence Conmiunity and the CIA in 
particular performed a valuable service in putting this issue squarely before those in the U.S. 
Government and in allied governments who needed to know about it in order to take appropriate 
action. 

I stated publicly during my tenure and have said fi«quently thereafter that this is one of 
the most important issues the United States faces. This is really for three reasons. 

First, the organized crime and corruption problems together have the potential to 
destabilize the Russian state. Russia remains one of the nations that can destroy the United 
States within the 30-minute flight time of an ICBM. Thus political instability and 
unpredictability among those a^o command and control Russia's strategic systems are of 



247 



paramount importance to us. 

Second, there is the real possibility that Russian organized crime groups may be, or 
become, involved with the sale of technology or materials for weapons of mass destruction or 
other modem military technology. Such sales could be highly profitable in the right quarters, 
e.g. to Iraq, or to certain terrorist groups, so this is an area where there could be a confluence of 
interest between Russian organized crime and bitter enemies of the United States. 

Third, Russian organized crime can use its resources to corrupt institutions here in the - - 
United States. The recent case involving the Bank of New York may prove to be one such 
example. 

I have been particularly concerned for some years, beginning during my tenure, with the 
interpenetration of Russian organized crime, Russian intelligence and law enforcement, and 
Russian business. I have often illustrated this point with the following hypothetical: If you 
should chance to strike up a conversation with an articulate, English-speaking Russian in, say, 
the restaurant of one of the luxury hotels along Lake Geneva, and he is wearing a $3,000 suit and 
a pair of Gucci loafers, and he tells you that he is an executive of a Russian trading company and 
wants to talk to you about a joint venture, then there are four possibilities. He may be what he 
says he is. He may be a Russian intelligence officer working under commercial cover. He may 
be part of a Russian organized crime group. But the really interesting possibility is that he may 
be all three - and that none of those three institutions have any problem with the arrangement. 

In addition to the above points, all I have said publicly, Mr. Chairman, about our work 
during that period is that I agreed with my successor, Mr. Deutch's public statement during his 
tenure that one of the groups involved with organized crime in Russia was Mr. Louchansky and 
his company, Nordex. 

I would point out to the Committee, however, that I resigned during the second week of 
January, 1995. Since then, on this issue, I, like Will Rogers, only know what I read in the 
papers. Having brought a bit of backgroimd and some views to the subject during the now nearly 
five years since I resigned, however, I do have some judgments about this issue which I would 
offer the Committee. I want to stress, however, that at this pomt my testimony moves from what 
I know to, based on public sources, yvbax I believe. 

I have no reason to dispute the Russian government's estimate that criminal syndicates 
now control around 40 per cent of the Russian economy. And, as you pointed out in your piece 
earlier this month in the New York Times. Mr. Chairman, there are higher estimates as well. Nor 
does the problem seem to be declining in intensity. One of the problems pointed out to me last 
week by former Interior Minister Kulikov is that the Duma has passed anti-corruption legislation 
five times that has either been vetoed or otherwise sidetracked by President Yeltsin and his staff. 

The heart of the matter seems to me to be the difficulty we have in finding an honest 



248 



institution or group of individuals with whom we can work on a long-term basis. 

I might contrast the current Russian situation with that m Italy some years ago, when 
organized crime was an extremely serious matter there, reaching very high in the Italian 
govermnent. But in Italy, by law and tradition, there was at least a critical mass of honest 
magistrates with the authority to investigate and prosecute - Italian "Untouchables", in other 
words. The FBI and other parts of the U.S. Government thus had a solid group of professional 
and honest parmers with whom to cooperate, and although it was far from easy, substantial 
progress has been made against organized crime in Italy in recent years. 

In Russia, although there are individuals with whom, from time to time, we can work in a 
frank and fully cooperative manner, there does not seem to be a critical mass akin to what was 
provided by the Italian magistrates: a group of Russian colleagues with whom we can work on a 
broad front and on a long-term basis. Perhaps the Presidential election in Russia next summer 
will lead to such a development within the Russian government. If not, I don't see how we will 
be able to make progress beyond what we can do on our own. This is important for us to do, but 
it will not solve the problem. 

Let me conclude, Mr. Chairman, with the following point. I have been asked frequentiy 
since the story began to break a few weeks ago concerning money laundering through the Bank 
of New York whether during my tenure I detected any lack of willingness at the senior levels of 
the U.S. Government to hear information about this subject. My answer to that specific question 
is no, I detected no such lack of willingness as of January, 1 995. 

But during the last several years we have seen that to an extraordinary degree the United 
States has become identified with President Yeltsin and the many teams he has selected, then 
fired, then selected, etc. to work with him. We have also been quite generous financially, both 
directly and through international institutions such as the IMF. We have, through the IMF and 
otherwise, pushed for increased tax collections and tight budgets. Each of these approaches at 
one time or another may have been defensible. But if one steps back fix)m them and looks at the 
overall pattern, it is easy to see how ordinary Russians, who saw us in highly idealized terms just 
a few years ago, have turned so sour on the United States. 

In their eyes, we are the supporters of those who have stolen much of their national 
patrimony through a highly-corrupted privatization process and we are, at the same time, those 
who insist that the ordinary people of Russia bend their backs even harder. We are seen, in short, 
by average Russians as supporting the system and the individuals who are exploiting them. To 
them, America has won the cold war and then helped give them a capitalist economic system that 
is modeled not on Silicon Valley, but on the Chicago liquor market of the 1920's. Something is 
badly wrong here, but the roots of the problem do not lie solely in our knowledge about and our 
approach toward dealing with Russian organized crime. They are far deeper - in the 
fundamental approach toward Russia that has, perhaps in a fit of absent-mindedness, become 
American policy. 



249 



TESTIMONY OF FRITZ W. ERMARTH 

ON 

RUSSIAN ORGANIZED CRIME AND MONEY LAUNDERING 

BEFORE 

THE HOUSE COMMITTEE ON BANKING AND FINANCE 

21 SEPTEMBER 1999 

Mr. Chairman. I deeply appreciate the opportunity to testify before this committee on the challenge posed 
by Russian organized crime and its threatening practices, such as money laundering. 

I would like to focus my testimony on the larger context of Russian developments that have spawned this 
challenge We should have little doubt that our law enforcement agencies and our financial Institutions will 
respond to the threat from Russian organized crime. It is both serious and novel in the forms It takes. The 
inquiries of this committee will surely help 

But we must keep the most important issue in the forefront, as your public statements indicate that you do, 
Mr. Chairman 

We must consider how our country's future security and well-being will be threatened If, once again, 
Russia fails in the historic task of finding her way to authentic, stable democracy and a just, prosperous 
society with a market economy. 

My bottom line is this: Russia is not lost. Russia is stuck in a swamp between the Soviet past and several 
alternative future possibilities, some invitingly bright, some ominously dark. The larger purpose of these 
hearings, in this and other committees, and of the debate now, finally, taking place in our political arena 
about Russia, is to understand her condition and prospects better and to inform better American policies 
for encouraging the brighter prospects of democracy and capitalism. 

The threat from Russian organized crime springs from two fundamental and interrelated realities: first, the 
grave weakness of the rule of law in Russia, and second, the perversions of what we have called economic 
refomi. 

The Soviet communist system was itself a kind of structured lawlessness. To be sure, the Soviet Union 
had myriad laws. But they were not rules for regulating relations among the members of a self-goveming 
society Rather they were tools for maintaining power, to be used, abused or ignored by those who held 
power They afforded ample space for official and unofficial criminality. In the later Soviet period, the 
manifestations of this - ranging from petty thievery, to organized crime, to enrichment of the partocracy - 
expanded as the structures of Soviet power decayed The collapse of communist rule gave free rem to 
these phenomena in a new setting. 

The new setting is something for which I have not found a good definition. It has important features of 
democracy and capitalism, but it is not authentic democracy and capitalism. Focusing on the economic 
side, I would use the term crony capitalism without much capitalism. It lacks firm property rights and good 
corporate governance. It is about the distribution and especially concentration of wealth, but far less about 
investment and the creation of wealth. And, above all. it is about the extraction and expatriation of wealth 

This came about in large measure because of the manner in which the reformers of the post communist 
regime tied to create capitalism amidst the wreckage of the Soviet order As one analyst I've read put it, 
they proceeded in good communist fashion to create a new capitalist dass by basically appointing them. 
Relying largely on privileged, insider relationships, vast resources and enterpnses were placed into private 
hands, often old communist hands, at lees than fire-sale prices. Enterprises were sold off at less than 
cash value of annual revenues in some cases. Export and import privileges were handed out to cronies 

Thus, the process of privatization was from the outset a rip-off at the expense of the state and society. 
This, along with the destruction of people's savings through gratuitous inflation in the eariy 1990s, deeply 
blighted the public's view of capitalism from the outset. The reformers took a course certain to alienate 
society; and they deliberately ignored the task of building public understanding and support. 



250 



It still might have worked out had the new owners proceeded to manage their new wealth as real capitalist 
entrepreneurs by investing, building, and creating Far too often, however, they did not. Lacking 
confidence that their new wealth could be profitably invested in Russia or even that they could hold on to it, 
they all too often extracted it. stripped It, plundered It out of Russia and sent It abroad where it could be 
safe and productive. In this manner a country rich in natural resources and productive potential saw its 
state and society impoverished. The society and domestic economy reacted with various coping 
strategies, from barter trade to moonlighting work. The state reacted v^h measures that went beyond very 
creative financing, like simply not paying its bills. Among other things, it created what appeared to be a 
no-lose casino in short term debt by wt^ich Russian and then foreign speculators essentially were allowed 
to plunder the state budget until it collapsed in August 1998. 

What we've seen here is not so much organized crime as authorized crime intertwined with corrupt 
government and politics at all levels And it has abetted and been abetted by organized crime with its 
money laundering skills and protection racketeering. 

The fundamental misdemeanor of Western, including American, policy was that it bought into this phony- 
crony capitalism too uncritically and for too long. So did the mainstream media, and the mainstream 
foreign policy establishment. The protests of Russian and Western observers who knew what was going 
on went unheeded. One of the sad consequences was that IMF lending, while aiming to stabilize the 
economy and encourage investment, actually lubricated and legitimized this process of stripping and 
expatriation of wealth It was more perversion than diversion of IMF money, although some of the latter 
probably occurred last year. 

If one includes the period of the late 1980s, when much of this activity accelerated under the aegis of the 
KGB and the communist leadership, one might guess that from 200 to 500 billion dollars have left Russia 
In what Is very loosely called capital flight. Some of it Is derived from plain crime, like drug traffic, stolen 
cars and weapons Some it is entirely legitimate except for tax evasion I strongly believe that most of it is 
in the gray zone in between, that is, the product of phony-crony capitalism Some of it gets laundered 
because its owners need to disguise its origins to all observers. But a lot of it just gets deposited and 
invested. And not much of It stays In Cyprus or other tax havens Much of it, probably most of it. has 
come into the biggest, safest, most accessible, and profitable investment target in the world, the United 
States. 

Here it undoubtedly goes in several directions. Some stays liquid for future use Some returns to Russia 
for business, political, or criminal purposes. Some gets invested in portfolios, real estate, and business. 
And I am sure that some of it goes to political contributions of various kinds. Why can I permit myself this 
seemingly inflammatory statement? First, t>ecause of the logic of the situation; that" s normal behavior for 
this kind of money. And I am sure it is quite bipartisan, because this kind of money doesn't care about the 
values, the issues, the candidates or the parties It cares about influence Second, because there have 
been some examples in the press. And, third, because knowledgeable FBI specialists in this area have 
said so This is. I believe, a proper subject for the investigations of this committee 

I would assign greater weight however, to a more general problem Money on this scale acquires patrons, 
protectors, and leverage. How much leverage and with what effects on government policies? I vrauld ask 
for example: Did those Americans heavily invested in the Russian GKO market, by which vast profits were 
extracted from the Russian budget and vast losses risked, exert influence on the US Government to 
encourage more IMF lending last summer? Mr. Soros and others have strongly implied so. 

Mr. Chairman, let me state that the picture I have painted so far is unfair. There is real capitalism and real 
democracy in Russia. There are decent businesses, honest policemen, and dean politicians Which 
retums me to my first point. Russia is stuck, not lost If the Russians can somehow get through the 
current crisis of terrorism, conduct their elections, and create a somewhat stable and legitimate 
government, I believe there Is a possibility that a window for real reforms will reopen. I hope then we shall 
be ready to be supportive with policies more perceptive, more honest, and more constructive than they 
have been In the past At least we must avoid repetition of past errors. That I see as the most important 
purpose of our inquiry here. Thank you, Mr. Chairman. 



251 



Testimony Before the Committee on Banking and Financial Services, 
United States House of Representatives 

By Dimitri K. Simes, President, The Nixon Center, and 
Paul J. Saunders, Director, The Nixon Center' 

Tuesday, September 21, 1999 



The outrage expressed by Russian officials over recent wide-ranging corruption allegations is 
obviously self-serving to no small extent. Nevertheless, the surprise expressed by current and 
former Russian officials at the Clinton Administration's "shocked, shocked" response to Russian 
corruption is understandable; indeed, while new cases have arisen, the administration has known 
the extent and magnitude of the problem for some time and has done very little. 

Russian Corruption 

Although corruption and organized crime had estabUshed roots in the Soviet Union and pre- 
revolutionary Russia, they received a major boost from the collapse of the Soviet Union and 
Russia's early misguided efforts at reform. Facing not-so-gentle encouragement from the 
International Monetary Fund to liberalize its economy, Russia freed most prices from state 
control shortly after its independence in 1992. The resulting hyperinflation wiped out the 
savings of ordinary Russians well before the government was able to develop a privatization 
strategy. As a result, when privatization finally began, its benefits were limited to a very few. 

Three key groups - so-called nomenklatura managers, commercial bankers, and organized crime 
lords - soon emerged as the principal beneficiaries of privatization. The managers used their 
administrative confrol over enterprises to win de facto and even dejure property rights. The 
bankers, who were not really bankers at all, used their initiative and government connections to 
win control of vast amounts of state funds, the interest from which was routinely skimmed into 
private accounts (as were portions of the principal, in many cases). Organized crime lords took a 
more direct approach, using Russia's chaos to take confrol of enterprises through violence, to 
demand "protection" payments, and to corrupt law enforcement bodies. 

While the fimdamental decisions that led Russia down this path were taken in Russia by 
President Boris Yeltsin and others, many key choices were taken under heavy pressure from the 
Clinton Administration and the International Monetary Fund. President Yeltsin's decision to 
give priority to macroeconomic policy at the expense of legislation to develop a healthy market 
in Russia - a move strongly encouraged by the administration - came at a particularly high cost 
as it discouraged investment, spurred capital flight, and facilitated widespread corruption. 

In the seven years of Russian independence, corruption has penetrated virtually every sector of 



' The views expressed in tfiis testimony are solely those of the authors and do not represent an institutional position 
on die part of The Nixon Center. 



252 



society. It is not limited geographically or functionally. Corruption knows no limits within the 
Russian government as well; it has grown rapidly not only in the executive branch but also in 
Russia's legislature, where it is well known that votes are for sale. 

At this very moment an effort is underway in Russia's State Duma, the lower house of 
parliament, to overturn President Yeltsin's veto of a recent protectionist and confiscatory 
insurance law. According to Russian accounts, a great deal of money has changed hands in a 
drive to submit a new law that would violate Moscow's existing international obligations and 
virtually force foreign insurers fi"om Russia. Moreover, the companies reportedly behind the new 
law - such as Spasskiye Vorota and Ingosstrakh - are allegedly involved in unsavory practices 
including so-called "wage schemes" that evade payroll and income taxes by substituting bogus 
insurance payments for wages. These and other schemes deprive ordinary Russians of reliable 
insurance, deprive the Russian government of much-needed tax revenue, and open up the 
insurance industry to money-laundering rackets. One source estimates that 80% of Russia's life 
insurance policies are fi-audulent. 

American Policy 

Recent revelations from the U.S. Embassy in Moscow published in The Washington Post and 
The Wall Street Journal demonstrate conclusively that the administration has been aware of the 
scale and scope of Russia's corruption problem for some time. Although there seems to have 
been some disagreement between the political and economic sections in the embassy in recent 
years, its staff produced many cables - including some signed personally by then- Ambassador 
Thomas Pickering - that unambiguously described the cancerous growth of official corruption 
and organized crime and the perversion of Russia's historic transformation. [Unfortunately, from 
all available accounts, this objective reporting apparently ended after Ambassador Pickering's 
departure from Moscow.] Central Intelligence Agency analysts brought similar information to 
the attention of their superiors. And, of course, scholars and journalists have pubHshed 
extensively on Russian corruption. Dimitri Simes, among others, has personally discussed these 
issues with senior officials including Deputy Secretary of State Strobe Talbott. 

Thus is not a lack of information that explains the Clinton Administration's failure to act on 
Russian corruption but the administration's determination to ignore the problem combined with 
its simplistic division of Russian political leaders into "good" and "bad." Although Secretary of 
State Madeleine Albright insisted only last week that the administration's policy was intended to 
support "good people doing the right things" it seems increasingly evident that it has actually 
aided very imperfect people doing misguided things, at a minimum. 

Some of the administration's greatest favorites in Russia have been involved in dubious activities 
of which the administration has been aware, and which it has ignored, for years. For example, 
attempting to distance itself from the Russian government's more obviously corrupt policies, the 
Clinton Administration is now trying to claim that it did not support the controversial "loans-for- 
shares" privatization program, through which leading Russian enterprises were auctioned off to 
well-connected banks at bargain prices. This argument is at best disingenuous taking into 



253 



account the administration's unstinting support of Anatoly Chubais, the architect of the loans- 
for-shares scheme, and of Russia's privatization pohcies more broadly. In the words of Richard 
Momingstar, then the coordinator of U.S. aid to the former Soviet Union, "If we hadn't been 
there to provide funding to Chubais, could we have won the battle to carry out privatization? 
Probably not. When you're talking about a few hundred million dollars, you're not going to 
change the country but you can provide targeted assistance to help Chubais." Then Deputy 
Secretary of the Treasury Lawrence Summers was still sufficiently enamored of Chubais and his 
circle to call them "an economic dream team" in 1997. If anything, the administration's support 
for Chubais grew after the true natiu'e of the loans- for-shares privatization became apparent. 

Moreover, the Clinton Administration supported Chubais, other so-called "radical reformers," 
and their patron President Yeltsin with much more than rhetoric and a few hundred million 
dollars. In fact, it pushed for a $10.1 billion International Monetary Fund credit to Russia in 
early 1996 - after IMF officials criticized Russia for failing to implement reform and at a time 
when it was well known that substantial Russian government funds were "managed" by leading 
banks that were siphoning away public money. Furthermore, because the loans were given as 
general budget support and commingled with other Russian government monies, it is virtually 
impossible to determine the origin of any particular dollar or ruble in a given account - a fact that 
makes statements that there is "no evidence" of the misuse of IMF credits meaningless. And the 
IMF was no rogue elephant in its lending to Russia; senior administration officials have 
themselves referred to the Fund as a proxy for American policy. 

It is not surprising in this climate that those Russian leaders supported by Washington, who were 
simultaneously making concessions to the U.S. on foreign policy matters, developed a certain 
sense of impunity. They may have heard the administration's half-hearted statements of concern 
over Russian corruption but did not take them seriously. And why should they, when as recently 
as May of this year National Security Advisor Sandy Berger, Treasury Secretary Robert Rubin, 
Secretary Albright, Mr. Siunmers, and Mr. Talbott received Anatoly Chubais - no longer a 
government official - during a visit to Washington. Enjoying such access to the administration, 
Chubais and others had every reason to believe that its protests were Uttle more than a public 
relations measiu'e. 

The lack of seriousness behind the administration's pronouncements about Russian corruption is 
further demonstrated by the fact that the Clinton Administration did make clear to Moscow that 
there was a price to pay for disregarding American warnings in other areas. American pressure 
significantly influenced Russia's behavior in the Bosnia and Kosovo crises, its dealings with 
Iran, and many aspects of its macroeconomic policy. Corruption was never given this level of 
priority. As a result, even today the administration's warnings on the issue are dismissed in 
Russia. For example, the Russian newspaper Izvestiya - which is generally favorable in its 
coverage of the Yeltsin inner circle - mocked Secretary Albright's statement last week that the 
administration would be "outraged" if it is proven that U.S. assistance to Russia has been stolen. 
"That is all," the paper wrote, suggesting that an American response limited to "outrage" was not 
of particular concern. 



254 



Meanwhile, in Russia, there have been very few real investigations of corruption. Attempts at 
investigation are routinely blocked and investigators are fired, transferred, blackmailed, or 
themselves accused of impropriety, as has occurred in the case of former Russian Procurator 
General Yuri Skimitov. Since so few officials are entirely clean, counter-charges alone are often 
quite effective in killing inquiries. As a result, few are punished other than those out of favor or 
"small fish" selected to teach someone a lesson. The well connected, particularly those close to 
President Yeltsin, have Uttle to fear. 

All of this comes at a cost. Years of American support for the corrupt and ineffective Yeltsin 
regime have discredited the United States among ordinary Russians and led many to suspect that 
the U.S. seeks not to help but to weaken Russia. Ironically, now even the administration's 
"fiiends" in Russia are confused about American policy and are irritated by the sudden escalation 
of anti-corruption rhetoric from senior U.S. officials. 

Corruption has seriously damaged the way the Russian people view democracy and a market- 
based economy, discouraged significant domestic and foreign investment, and contributed to 
Russia's addiction to foreign credits (which, in the view of many Russian and Western observers, 
do not help the country's economy but rather end up being abused or exported). Because of the 
high-profile involvement of the Clinton Administration and international financial institutions 
influenced by the U.S. in Russia's transition, these developments cannot but contribute to the 
growth of anti- American sentiment in Russian society. While some may argue that anti-U.S. 
sentiment has limited significance in a weak, Augmented Russia, it could have very serious 
implications for U.S. foreign policy and American interests more broadly in a recovering Russia. 
Moreover, just as too few analysts understood how weak the U.S.S.R. was and predicted how 
quickly it would collapse, today only a small minority realizes how quickly Russia could be on 
the road to recovery under strong leadership. If combined with a sense that the United States is a 
hostile power, a modest recovery, or even the perception of recovery, could drive Russia to seek 
arrangements with China or so-called "rogue states" such as Iraq and North Korea that would be 
detrimental to American interests and values around the globe. 

Should the United States face a hostile, recovering Russia in the fiiture, we may well find that the 
Clinton Administration's tactical gains fit>m Russian cooperation (or, more accurately, 
acquiescence) in the international arena will be more than offset by the longer-term costs of 
failing to develop genuine partnership with Moscow. Russia still has thousands of nuclear 
weapons and a dangerous capability for the proliferation of sensitive technologies. And while it 
probably can never again be a global rival to the United States, Russia could be a major player in 
any of a number of potentially threatening anti- American alliances. This cannot but have a 
negative impact on Amoican global leadership in the 2 1 st century. 

In its policy toward Russia, the Clinton Administration has clearly been on the wrong side of 
history. It has siq)ported not donocratization and economic reform but the polarization and 
corruption of Russian society. The administration cannot be said to have lost Russia, because 
Russia is not yet lost and was never ours to lose anyway. But to the extent it has had an impact 
on Russia's historic transition, that impact has been negative - and America's interest in a stable, 
donocratic, and friendly Russia has suffoed profoundly. 



255 



Testimony of the Center for the Study of Transnational Crime and Corruption (TraCCC) 
At American University, Washington, D.C. 



Money Laundering Hearing 
September 2 1,1999 



Before the Committee on Banking and Financial Services, U.S. House of Representatives 



Prepared by: 

Prof. Vladimir Brovkin 

Prof. Keith Henderson 

Prof. Louise Shelley 



256 



Money laundeiung/transnational financial crime and corruption: 
a high priority for the 2l" century 

Whatever the facts and findings of the Bank of New York/Russian money laundering case, it is 
representative of larger, inter-related global problems: weak, non-transparent global and country 
banking systems, poor oversight and accountability, strong transnational criminal networks and 
official and corporate corruption. 

As global integration, new technologies and democracy has taken root in the 1990s, international 
financial crimes, such as money laundering and public and private sector corruption,), should be 
among the highest priority issues for the new millennium. They present a new pressing threat to 
global economic and political stability that requires new creative solutions involving partnerships 
between the public and private sectors. When combined with the overall weakness of the world's 
financial system, as exhibited most recently in the Asian financial crisis, they have the potential to 
rock governments and create regional and global economic and political instability. 

Just as Russian legislation was inadequate for the profound economic transition, the international 
financial community is poorly equipped with a legislative and enforcement fi-amework to cope with 
the global economy. The Russian money in the Bank of New York case epitomizes the inadequacies 
of our present system. It is a wake-up call to the public and private sectors and the multi-lateral 
community. 

An analysis of the Bank of New York's multi-billion dollar Russian money laundering scandal 
vividly reveals the complexity, severity and myriad public policy and private sector issues 
confronting the global community. This case should also be an alarming wake-up call to US and 
Russian policy makers, including Congress and the White House, multi-lateral institutions - such 
as the IMF and the World Bank, financial institutions and regulators ~ and the public. Scandals of 
this nature are not new and are not specific to Russia. However, the analysis of the money flows will 
help us understand the depth and breadth of Russian organized crime and corruption activities in the 
US and around the world. 

While we do not know all of the facts, the magnitude, multiplicity and unholy marriage of players 
and countries in the Bank of New York case, in both the private and public sectors, is representative 
of a larger problem and clearly illustrates the need to address both its causes and symptoms. This 
global problem is estimated to be similar in size to the international narcotics trade currently 
estimated to be as high as $500 billion annually. Thus, it should be treated as seriously and 
holistically as the war on drugs and should be seen as an important source of money for drugs and 
other criminal activities. 

It's not just a Russian mob issue anymore. Venerable US and multi-national corporations and 
financial institutions, a host of countries such as the US, Switzerland, Russia and the United 
Kingdom, and fimds fi'om multiple criminal, corrupt, donor and legitimate sources, are all part of 
this complex picture whether they are directly implicated in this case. Research conducted at 
TraCCC on a number of Russian money laundering cases reveal the complex sources of illicit capital 



257 



and the complexity of the money laundering routes and methods. 

The root causes are varied but primarily relate to the a "culture of secrecy" that exists within the 
cultures of the diplomatic, multi-lateral and business commimities, inadequate international law 
enforcement cooperation and high-level public and private corruption. The failure of multinationals 
and international lending institutions to understand the extent and impact of organized crime and 
corruption have made many turn a blind eye to these phenomena. The uru-egulated nature of the 
transitional Russian economy provided more opportunities for speculation, insider trading, asset 
stripping and movement of assets to offshore locations. 

A NEW NATIONAL SECURITY THREAT 

Transnational crime and corruption of this scale and nature represents a threat to national security. 
They have the potential to destabilize political and economic systems ~ particularly in transition 
countries and emerging markets such as Russia, Mexico, Indonesia and Brazil. In addition, they 
impact disproportionately the poor and emerging middle class. 

During the 1990's we began to rethink the military/national security issue within the post-Cold War 
global order. On the dawYi of the new millennium we need to rethink the financial/national security 
issue within the context of the new global financial order. 

The NET RESULT: SECTORAL PERSPECTIVES/lSSUES 

The net result of high level corruption, large scale money laundering and financial and economic 
stability is that it impacts society in general because dirty money feeds the coffers of transnational 
criminal networks involved in a wide range of illicit activities, including nuclear and weapons 
smuggling and narcotics and human trafficking. It also places at risk the security of the public's 
investments in pension funds and the stock market. 

For the financial sector, more transparency, accountability and regulatory oversight are required. 
Current internal employee guidelines and training, as well as existing external regulations/laws and 
procedures related to international cooperation and information sharing are inadequate. Among 
other things, "know your customer" and "know your employee" rules should be re-evaluated and 
effectively but fairly enforced within a democratic context including respect for privacy rights. 
Maintaining the public's faith in the US and global financial system must be among the most 
important objectives of this united effort. 

For the foreign policy sector and multi-lateral financial institutions, such as the IMF and the 

World Bank, new policies and procedures for dispensing and monitoring aid and loans must be 
developed. "Know your donee" rules, conditionality, sanctions, independent audits and civil society 
monitoring and oversight mechanisms should be developed and enforced. For diplomatic and 
political reasons, governments and multi-laterals may have to sometimes deal with corrupt public 
ofBcials and representatives of the private sector. However, they should not do so with a blind eye 
or without accountability or regard to its full impact on the public and reforms. 



258 



For the private and professional sectors, our research shows that money laundering and high-level 
corruption at this scale can not be consummated without the complicity of an army of "bankers", 
accountants, lawyers, business and financial advisors. These and other professions and corporations 
should adopt the kind of practices, ethical standards and procedures that make them part of the 
solution ~ not part of the problem. They should also be held accountable when they knowingly 
advance the interests of criminal networks and/or corrupt officials and help launder or hide dirty 
money. 

For public policy makers, new laws and procedxires must be developed to address a panoply of 
inter-related problems. Enhanced intenmtional cooperation, transparency and accountability, as well 
as more civil society oversight, should be the key reform goals. In addition, if legal instruments like 
the amended US foreign corrupt practices act, the new OECD anti-bribery treaty, the organization 
of American states anti-corruption treaty and other intemational commitments (such as those made 
by member countries of the financial action task force) are to have meaning and make a difference, 
they need to address the full range of problems and to be properly enforced. This will require more 
oversight and monitoring fi-om civil society, policy makers and the law enforcement community. Of 
particular import is the need to step-up intemational efforts to regulate off-shore banking centers and 
shell corporations. More regulatory oversight and accountability are needed in many countries in 
the developing, transition and developed world. Future economic assistance to developing and 
transition countries should be conditioned on banking, transparency and accountability reforms. 

For policy makers in transition countries and emerging markets, these kinds of transnational 
problems present an opportunity to focus on key institutional, political and economic reforms that 
will enable them to become part of and compete in the new global economic and political 
community. At the macro level, the majority of these countries should devote special attention to 
creating key institutions such as an independent media, accounting chambers (G AOs), judiciary and 
parliament and regulatory oversight institutions ~ particularly those related to the banking sector. 
At the micro-level, special attention should be devoted to strengthening the fmancial sector by 
adopting and enforcing intemational norms, laws, policies and regulatory standards that promote 
investment, transparency, accountability and public trust in the banking system. 

For the intemational law enforcement and intelligence communities, more effective ways to 
enhance national and intemationai coordination, to undertake joint investigations and prosecutions 
and to work more closely with civil society must be found. We need to help provide the resources 
and incentives to promote cooperation, promote reforms and build public trust and participation. 



Recommendations 

1. Rethinlt regulation of global financial markets 

We need to rethink how we regulate finaiKial markets in the global environment The costs of foiling 
to address large-scale financial crime are severe because this activity is potentially very threatening 



259 



to the US and the welfare of all citizens. The end of the Cold War has made us rethink national 
security in the military arena. We need to give equal attention to rethinking financial security in the 
international fmancial arena. National sovereignty of many coimtries may have to be diminished to 
facilitate international cooperation. 

2. Need to be more vigilant in addressing grand corruption 

We need to be much more vigilant in addressing grand corruption both in foreign leaders and in 
those individuals at home who facilitate corrupt activities in the global markets. The lawyers, 
investment firms, bankers and accountants who facilitate corruption and organized crime must be 
subject to greater scrutiny and to appropriate sanctions. 

3. Need special inter-agencv focus on non-drug related money laundering 

Prevention of large scale money laundering requires greater coordination of intelligence, law 
enforcement work, political and financial analysis. It cannot be addressed by training programs alone 
but needs to be addressed in a coordinated way as we now approach drug trafficking. The bank of 
New York case progressed to far because we lacked an inter-disciplinary approach and adequate 
human resources assigned to the problem. 

4. Cannot politicize issue of corruption otherwise will polarize rather than unite those 
addressing the problem 

We need to prevent the politicization of the Russian corruption issue. By doing this, we are losing 
the support of those who are our natural allies on this issue. We are also undermining long term 
Russian-US relations that are needed to address this problem. 

5. Need to address transnational financial crime and corruption in times of high profit as well 
as times of reduced profit such as in nissia today 

We need to address the financial crimes and corruption issue in times when individuals are making 
money as well as at such times as now after the Russian crisis in which there is less money to be 
made. We must change the incentive system so it is in the interests of individuals to conduct greater 
due diligence on their clients and to say no to questionable clients and transactions. 

6. In Russia, need to encourage policies that bring money from the shadow economy without 
legitimizing the theft of the Russian state 

Within the Russian context, reforms must be focused on developing a middle class aixl stake holders 
in a market economy and democratic society. Policy must be focused on developing a rational tax 
policy in cooperation with members of Russian parliament which will limit capital flight and 
d im i n i sh the control of organized crime. Strategies must be developed to bring back coital from the 
shadow economy without granting an anmesty to capital diat was acquired at the costs of citizens' 
lives or the impoverishment of citizens. 



260 



7. Russia needs to enact legislation and adopt effective enforcement strategies 

Russia needs to develop new corporate govemance/ethics niles, respect for contract sanctity, 
effective and fair enforcement of judicial decisions, balanced regional regulation by federal and state 
authorities, proper income and asset disclosure, adoption and implementation of international 
accounting and procurement standards. New legislation needs to be adopted in the tax, criminal law, 
money laundering and asset forfeiture procedure arenas. 

8. International banking, multinational corporations and lending institutions must enhance 
oversight within their institutions and in international operations 

In the international banking, multinational corporate and multinational lending institutions more 
transparency, accountability and regulatory oversight is required. Current internal employee 
guidelines and training, as well as existing external regulations/laws and procedures related to 
international cooperation and information sharing are inadequate and must be enhanced. Among 
other things, "know your customer" and "know your employee" rules should be re-evaluated and 
effectively but fairly enforced within a democratic context 

9. Greater oversight in needed in international loan policy. More attention must be paid to 
preventing diversion of money by corruption and organized crime. 

For the foreign policy sector and multi-lateral financial institutions, such as the IMF and the 
World Bank, new policies and procedures for dispensing and monitoring aid and loans must be 
developed. "Know your donee" rules, conditionality, sanctions, independent audits and civil society 
monitoring and oversight mechanisms should be developed and enforced. Greater cooperation must 
occur with internal watchdogs such as accounting chambers. The essential role of a free press in 
investigating corruption must be recognized and journalists must be granted greater freedom to 
information and protections in case they are threatened for their reporting. 

10. Greater attention must be paid to developing policies to seize and repatriate assets which 
promote development and public policy goals. 

New and improved international policies concerning asset seizure and forfeiture laws, particularly 
policies related to non-drug related cases, should also be re-examined, since they provide the fuel 
for other forms of criminality, asset forfeiture policies should be developed wWch help foster 
international development and public policy goals such as clean environment and human rights. 



261 



AMERICAN UNIVERSITY 



WA8HINQT0N, 



LOUISE I. SHFllFY 

Director 



October 12, 1999 

Congressman La Falce 

Committee on Banking and Financial Services 

U.S. House of Representatives 

Room 2129, Raybum House Office Building 

Washington, D.C. 20515 

Dear Mr. La Falce: 

I have testified three times previously before Congress on the issues of Privatization and 
Corruption. These include: 

1) The Threat of International Organized Crime and Global Terrorism, U.S. House of 
Representatives' International Relations Committee, September 27, 1997. 

2) The Threat of Russian Organized Crime, U.S. House of Representatives' International 
Relations Committee, April 30, 1996. 

3) Corruption and Crime in the Former Soviet Union, Commission on Security and Cooperation 
in Europe, June 10, 1994. 

Two papers of mine sponsored by the National Council for Soviet and Eastern European 
Research addressed this issue and were circulated within the government. They are presently 
available at the Tumanov Library at the National Council. They were the following: 

"Post-Soviet Organized Crime: Implications for the Soviet Successor States and Foreign 
Countries," issued on February 8, 1994. A talk on this subject followed on April 11, 1994 
at the U.S. Department of State. 

"Privatization and Crime: The Post-Soviet Experience," issued August 10, 1995. A talk 
about this paper was held at the U.S. Department of State on May 16, 1996. 

I have also addressed the issue in the following fonim at the Wilson Center: 
"Privatization and Organized Crime", November 18, 1996. 

Center For The Study of Transnational Crime 

School of Pubuc Affairs 

4400 Massaghuscits avenue, NW Washington, DC 200l6«)43 Tel- 202-885-a»« Fax: 202.«85-2»BBr E-mail: lsheUe«anieikan.edu 



1998. 



262 

I addressed the lawyers' forum at the World Bank in a seminar on corruption in July 



Sincerely, 

Louise Shelley 
Professor and EMrector 



263 



Testimony of Yuri Sbvets 

Before the 
Committee on Banking and Financial Services 

of the 
United States House of Representatives 



September 21, 1999 



264 

From 1980 to 1990 I worked with the KGB foreign intelligence service. In September of 
1990, 1 resigned fix)m the agency on political grounds. It was clear to me that the 
leadership of the KGB and the Soviet communist party were ruining the country. 
Starting from 1988, the KGB intelligence service focused primarily on following 
domestic developments in the Soviet Union. Also, it was "preparing" for future market 
reforms in the country. Number one priority of any KGB officer was to work on 
establishing new businesses or penetrating existing businesses, including the banks. 1 was 
a senior analyst, and my responsibility included analyzing the information provided by 
the field officers and composing reports to the top leadership of the country. 
In this report I would like to focus specifically on just one KGB business operation. I 
believe it will by example give the distinguished members of this committee a better 
understanding of how Russia has been looted. This issue is widely discussed today, but 
the loot in Russia started before the Soviet Union collapsed. 

In September 1990, KGB active duty officer Major Chukhlantsev together with a young 
free-wheeler Alexander Konanykhine established a private company named 
Rosinformbank. Prior to that, 24-year-old Konanykhine had been involved in an 
unremarkable construction cooperative. He did not graduate any college, was energetic 
and apparently liked publicity. According to the KGB standards, he was a good candidate 
for a role of a KGB front. 

It should be noted that active duty KGB officers were authorized to engage in business 
activities under one condition only: When their activities in private business are carried 
out on behalf of and under directions of the KGB. In other words, Rosinformbank was a 
joint venture between Konanykhine and the KGB. Later, Rosinformbank gave birth to a 



265 



number of other businesses and then vanished without a trace. Even a Russian mihtary 
prosecutor office was unable (or unwiUing) to find a single document pertaining to the 
establishment oi Rosinformbank. It is noteworthy, because fi-om an intelligence 
viewpoint, it is essential that the first front organization to be established cover all traces 
of its successor organizations or its exposure can have a domino effect on the rest of front 
businesses. 

In December 1 990, Konanykhine and his wife established a company named 
Fininvestservice. In January \99\ , Rosinformbank (KGB) together with Fininvestservice 
established a company named the All-Russia Exchange Center (AREC). In doing so, 
Rosinformbank provided 100 percent of the initial capitalization of AREC, but gave away 
80 percent of the shares to Fininvestservice (Konanykhine.) This may not make sense 
from a business point of view, but it makes good sense from the KGB perspective: It 
made Konanykhine a front for AREC. The fact that this also turned Konanykhine into an 
official stockowner of AREC entitled to 80 percent of the profits did not matter. The 
KGB had a large arsenal of tools and methods to solve these minor technical issues much 
to their advantage. 

The KGB Major Chukhlantsev was appointed "technical director" of AREC. He also 
controlled AREC's finances. Other KGB officers - Boldyrev, Chukhlantsev and 
Sumskoy - were appointed to the board of directors of AREC. Konanykhine officially 
served as the chairman of the board and unofficially - as a front for the KGB-run AREC. 
Later, the All-Russia Exchange Center established the All-Russia Real Estate Exchange, 
the Secondary Resources Exchange and finally created the All-Russia Exchange Bank 
(AREB). The KGB controlled all those businesses through its officers placed on key 



266 



positions. Usually, they would take the top positions, or positions of deputy boss, and 
always filled in positions that controlled company's finances. 
The All-Russia Exchange Bank was established on 24 April 1991 by the All-Russia 
Exchange Center (controlled by the KGB), Investtrade (Director - KGB officer 
Boldyrev), Souzinformatizatsia (General Director Ryzkhov - KGB) and the All-Russia 
Real Estate Exchange (created under the KGB control.) All key decision-making 
authority for the establishment of the All-Russia Exchange Bank was the responsibility of 
the All-Russia Exchange Center, established and controlled by the KGB. In other words, 
the KGB had full control over all those businesses from the very start. 
Konanykhine fronted the KGB in the All-Russia Exchange Bank as its president. 
Among the Bank's employees there were about 200 KGB officers, including several 
Generals. Shortly after the aborted coup d'etat of August 1991, Konanykhine employed 
General Leonid Shebarshin, former KGB Chairman and the right-hand man of Vladimir 
Kryutchkov, leader of the aborted coup d'etat. Konanykhine would later claim that he 
hired the KGB men for protection. With respect at least to General Shebarshin this 
explanation is deceptive. 

After the failed coup d'etat, the top leadership in the KGB turned into pariahs in Russia. 
Kryutchkov was thrown into jail, and his men feared for their lives. They were afraid that 
the events in Russia might become similar to what had happened in 1956 in Hungary, 
where a nimiber of state security officers had been lynched by mobs in the streets. After 
the failed coup d'etat in Moscow, the mob torn down monument of the founder of the 
KGB and was ready to storm the KGB headquarters. 



267 



Faced with unprecedented public outrage against the KGB, most Russian government 
institutions, which traditionally had served as the KGB covers, declared after the aborted 
coup d'etat that they would close the KGB positions. The KGB top leadership was not a 
protection any more. They were huge liability. In that situation for a private business to 
employ a former KGB Chairman was next to insanity unless Konanykhine could not 
refuse the KGB demand. It was not General Shebarshin, who was protecting 
Konanykhine. It was rather Konanykhine, who was protecting the former KGB 
Chairman. 

There are strong indications that the A\\-Russia Exchange Bank was a "reliable cover" for 
the KGB, where the front man would clearly understand that he was entirely dependent 
on the KGB and had to comply with all the KGB instructions irrespective of the 
consequences. In most cases, the front man of a reliable cover company was a KGB 
human asset. The KGB had a file on him with as much of compromising materials as 
possible. A standard material was a document signed by the front man, in which he 
pledges to faithfiilly cooperate with the KGB. Given the importance of the All-Russia 
Exchange Bank for the KGB, I believe the strictest standards were applied to 
Konanykhine. 

After the aborted coup d'etat of August 1991, the KGB was ostracized and soon officially 
disbanded. It was reborn under the different names. The KGB men, who had penefrated 
businesses and banks, continued to operate there. To avoid conftision, I will keep calling 
them here "the KGB." 

On 21 October 1991, the All-Russia Exchange Bank received a license from the Central 
Bank of the Russian Federation that authorized the All-Russia Exchange Bank to execute 



268 



transactions with hard currency. The Hcense actually granted the All-Russian Exchange 
Bank a monopoly on banking transactions between Russian businesses and organizations 
and foreign institutions. Also, it authorized the Bank to buy and sell hard currency. The 
ruble was in a free fall. Trading it was a bonanza. 

According to the Russian political tradition, the decision for granting the license could 
not be made without the involvement of the top government and security officials. The 
motives of the decision have never been made public. It's remarkable, however, that the 
monopoly for hard currency transactions was given to a group of people that had 
absolutely no experience in miming a bank, not to mention working with foreign 
financial institutions. In normal circumstances, their chances for obtaining the license 
were nil. They were sure, however, they would get the license well before it was actually 
granted. It was not surprising - the KGB traditionally had very strong positions in the 
Central Bank 

The All-Russia Exchange Bank did not offer or engage in or provide traditional banking 
services. Its main function was to serve as a pipeline in channeling large amounts of 
money out of Russia, and it operated in this capacity approximately from November of 
1991 to May of 1992. The first corresponding account of the All-Russia Exchange Bank 
was opened at the Central-European International Bank, Budi^jest, Hungary. The 
Russian government and law enforcement agencies have never officially disclosed 
amount of money channeled by the All-Russia Exchange Bank out of Russia. However, in 
February 1997, the Russian interior minister Kulikov, speaking in a closed-door session 
of the Russian parliament, said that as a result of Konanykhine's activities as a financier 
$300,000,000 had vanished from Russia. Last week, Russian acting Prosecutor General 



269 

Yuri Skuratov in personal conversation confirmed to me that his office suspects 

Konanykhine of participating in a scheme, which resulted in illegally taking out of Russia 

at least $300,000,000. 

It should be noted that when the first democratic government of Russia chaired by Yegor 

Gaydar was formed, it discovered that Russian hard currency reserves were depleted. 

Rubles were not fi-eely convertible, and there was an acute shortage of hard currency to 

import the most essential goods - food and medicine. In this situation, the government 

appealed to the West to provide humanitarian aid to Russia. The aid, paid by the Western 

taxpayers, started to flow in. At the very same time, hundreds of millions of U.S. dollars 

were secretly channeled from Russia to the West by the Bank run by the old KGB guard 

and Konanykhine. 

In his resent appearance on CBS' 60 Minutes, on 19 September 1999, Konanykhine 

acknowledged that $1 billion was stolen torn Russia through the All-Russia Exchange 

Bank. 

Konanykhine was not a mastermind of the crime. However, given the information 

available to me at this point I strongly believe that he was an accomplice, who knowingly 

participated in the crime. 

In summer of 1992, the "pipeline" shut dovm - the Bank stopped channeling money out 

of Russia. Inexperienced founders of the Bank did not know how to operate it in normal 

circumstances, and it went de-facto bankrupt. Former KGB senior officials - the real 

masters of the Bank - withdrew. Lower-ranking KGB officers, formal officials of the 

Bank, started quarrel with Konanykhine over the remaining $12 million left on the 

Bank's accounts. 



270 



In September of 1992, Konanykhine entered the United States. He claims he had 
narrowly escaped a KGB attempt to kidnap him in Budapest, Hungary. The 
circumstances of this story, however, show that it was a mock kidnapping, if any 
kidnapping at all. It looks much more as an attempt of accomplices of the theft to split the 
profits "nicely." 

The next major financial operation was started by Konanykhine in March 1993, out of 
Willard hotel in Washington, D.C. At that time, Boris Yeltsin entered into a mortally 
threatening clash with the Russian parliament and no one could predict the outcome of 
this clash (it climaxed with Kremlin sending tanks to shell the parliament building in 
October of 1993.) Raising tension in Moscow was accompanied by massive flow of 
capital out of Russia. 

During this critical period Konanykhine, together with his partner, Yelena Cidorchuck, 
approached an American consulting firm with a project: to establish a bank, which was to 
receive billions of U.S. dollars fi"om Russia. He also is seeking about 125 naturalized 
foreign passports and diplomatic passports at any cost for very special Russian clients. 
His partner, Yelena Cidorchuck, made it clear to the American consulting firm they had 
retained that she and Konanykhine were working for the top political and social elite of 
Russia. They were receiving instructions fi-om Moscow. The establishment of the bank 
and the purchase of naturalized foreign passports for the prominent political and social 
elite was a matter of urgency. 

Technically, the whole operation launched by Konanykhine in Washington, D.C. has a 
strong resemblance to the story of Golden Ada - a Russian company established later in 
San Francisco, whose objective was to build Boris Yeltsin and his close associates a 



271 



financial heaven in the U.S., where they could escape in case of Yeltsin's defeat in 
presidential elections of 1996. 

There are indications that Konanykhine and his partner were working on a similar project 
on the eve of a bloody clash in Moscow of October 1993. He acted in capacity of vice- 
president of Menatep Bank. Details of Konanykhine's operation indicate that Russian 
intelligence officials were involved in it, at least on the planning stage. My personal 
knowledge as a former intelligence officer suggests that the people who directed this 
operation fi-om Moscow understood that very soon American government agencies might 
learn about it but turn a blind eye on it. Apparently, the Russians believed that their clout 
as a bastion against communism in Russia would outweigh their "small sins." Without 
this understanding the Russian masters would never dare to execute the operation out of 
American capital. 

In March 1994, the Russian Military prosecutor office starts criminal proceedings against 
Konanykhine charging him of "gross embezzling of state property and personal property 
- funds through fraud." On 30 September 1994, the Russian government requested his 
extradition to Russia. Konanykhine was not discouraged. In December of 1994, 
Konanykhine made a short trip to Moscow and then went to Antigua, where he worked 
on the establishment of European Union Bank. The trip to Moscow shows that he did not 
believe he would be persecuted there and was not afraid for his life, something he 
claimed later while applying for political asylum. 

Konanykhine was arrested by the INS and sent to jail in June of 1996. Prior to the hearing 
of Konanykhine case in the INS court, the Russian military prosecutor's office sent to the 
INS documentation, which was supposed to substantiate criminal charges against him. 



272 



Close examination of the Russian file showed it was an attempt to cover up KGB crucial 
role in setting and operating the All-Russia Exchange Bank, and also the real scope of 
Bank's operations. Russian military prosecutor's office, traditionally heavily influenced 
by the KGB, portrayed Konanykhine as the only culprit of the theft and charged him with 
embezzling of "just" $8.1 million. Missing $300,000,000, not to mention $1 billion, was 
not mentioned. In was a classic KGB cover operation, when a smaller thief is exposed in 
order to protect the big ones. 

On the first hearing at the INS court Konanykhine was denied political asylum he 
requested, but at second hearing political asylum was granted. In my opinion, both 
decisions were a mistake. The first decision was based on claims of the Russian military 
prosecutor taken at face value even though the INS had been notified the Russian 
documentation was a cover-up. The second decision totally missed the fact that although 
Konanykhine was not a mastermind of the theft, he was an accomplice. I believe it was 
made possible because the INS could not present to the court all documentation that was 
available to other U.S. govenmient agencies. 

As a result, decision on granting political asylum to Konanykhine opens the door to other 
Russian money launderer to apply for political asylum in this country or to the KGB 
human assets to establish themselves in the U.S. This case also shows that cooperation 
with the Russian law enforcement agencies on money laundering cases may be tricky. 
The Russian law enforcement agencies are widely corrupt and split between supporters of 
different Russian interest and often organized crime groups. On the other hand, given the 
rampant corruption and unprecedented expansion of organized crime in Russia, it is 
impossible not to cooperate with the Russian law enforcement institutions, and there are 



273 

honest people there, even though they do not have upper hand now. The solution may He 
in following the old Russian proverb: 'Trust but verify," meaning at least to scrutinize 
the documentation supplied by the Russian side. I believe that mistakes on Konanykhine 
case could have been avoided by timely and thorough analysis of all relevant information. 
Money laundering and organized crime in Russia have reached proportions 
unprecedented in human history. To a large extend it was made possible because large 
segment of the Russian bureaucracy reaching the top of the government has become the 
most dangerous part of organized crime. It is useless to appeal to Yeltsin's regime to 
solve the problem. The issue of what to do with the Russian kleptocracy has become an 
international problem. 

Institutionalized crime ruins Russia. It represents a serious threat to the whole world 
given Russia's vast territory and huge arsenals of weapons of mass destruction and 
nuclear power plants. In the present situation, to continue financial assistance to Russia 
means to further enrich and pervert corrupt Russian elite. The house must be cleaned 
first, and money stolen from the Russian people should be found and returned to them. 
Russian and Western intelligence services, looking for a sound objective after the end of 
the cold war, may find a noble assignment here and fertile turf for cooperation. The most 
odious thieves must be identified and punished. The Russian elite must be told laud and 
clear that if they ruin the country, transfer money to the West and plan to get away when 
the country collapses, it will not work. They will have to stay in Russia harvesting results 
of what they sowed. This message and determination to implement it may become a 
major deterrent of corrupt Russian elite. Any future financial assistance to Russia should 



274 



be redirected from the Russian government to the grass-root level, where it can reach 
Russian people, and it should be done under strict international control. 
Some analysts say that tough Western position towards the Russian government on 
corruption issues may have alienated Russia. I believe, it is not so. As the Russian saying 
goes, "Those who pay the money call the tune," and in Russia it is taken for granted. As 
long as the Western taxpayers pay Russian government bills, the West is entitled to state 
its position on corruption issue laud and clear. Otherwise, it sends the wrong signal to the 
Russian people that the West sides itself with the "corrupt guys in Kremlin." We should 
stop worrying about sensibility of corrupt Russian bureaucracy. People that loot their 
own country have no sensibiUty. They are totally dependant on the West, because this is 
the West where they build their safe heavens. 

Today, some analysts say that at least a generation is needed to return Russia back on 
track. I do not think so. Russian is not lost yet. Well-designed and dihgently implemented 
American policy on Russian money laundering and corruption issues may make a big 
difference for Russian people. It will be much cheiq)er than the present sponsoring of 
Russian crony capitaUsm. It will bring positive results faster. And it will be a contribution 
the Russian people will appreciate very much. 

Yuri Shvets 



275 



Testimony of Anne Williamson 

Before the 

Committee on Banking and Financial Services 

of the 

United States House of Representatives 



September 21, 1999 



276 



Before I begin my testimony, I just want to take a moment to thank 
Chairman Leach and Ranking Member LaFalce for the opportunity to share 
with the House Committee on Banking some of the things I have learned 
over eight years of watching our Russian assistance program unfold. 
Chairman Leach, I particularly want to commend your efforts to lead the 
Congress on this very timely investigation of the true nature and unhappy 
consequences of our Russian policies. 

I should like to add just a few words about myself by way of 
introduction. I am the author of CONTAGION: THE BETRAYAL OF 
LIBERTY; RUSSIA AND THE UNITED STATES IN THE 1990s, which will 
be available to Committee Members and the American public in time for the 
nation's Thanksgiving holiday. Prior to beginning my work on the book, I 
covered just about all things Russian for a broad range of publications which 
included inter alia The Wall Street Journal, The New York Times, Mother 
Jones, Art and Antiques, Premiere, Film Comment and SPY Magazine. 
From the late 1980s until 1997, 1 maintained homes in both Moscow and the 
United States. And therefore I can say for much of the last decade I had the 
privilege of being a witness to a dramatic history and the pleasure and 
excitement of sharing with the Russian people their remarkable land, 
language and culture. And it is with a profound gratitude to and a deep 
respect for that noble, heroic and too long-suffering people that I speak to 
you today. 

In the matter before us - the question of the many billions in capital that 
fled Russia to Western shores via the Bank of New York and other Western 
banks - we have had a window thrown open on what the financial affairs of 
a country without property rights, without banks, without the certainty of 
contract, without an accountable government or a leadership decent enough 
to be concerned with the national interest or its own citizens' well-being 
looks like. It's not a pretty picture, is it? But let there be no mistake, in 
Russia the West has truly been the author of its own misery. And let there 
be no mistake as to who the victims are, i.e. Western, principally U.S., 
taxpayers and Russian citizens' whose national legacy was stolen only to be 
squandered and/or invested in Western real estate and equities markets. 
The failure to understand where Communism ended and Russia began 
Insured that the Clinton Administration's policy towards Russia would be 
riddled with error and ultimately ineffective. Two mistakes are key to 
understanding what went wrong and why. 

The first mistake was the West's perception of the elected Russian 
president, Boris Yeltsin; where American triumphalists saw a great democrat 
determined to destroy the Communist system for freedom's sake, Soviet 
history will record a usurper. A usurper's first task is to transfomn a thin layer 



277 



of the self-interested rabble into a constituency. Western assistance, IMF 
lending and the targeted division of national assets are what provided Boris 
Yeltsin the initial wherewithal to purchase his constituency of ex-Komsomol 
[Communist Youth League] bank chiefs, who were given the freedom and 
the mechanisms to plunder their own country in tandem with a resurgent and 
more economically competent criminal class. The new elite learned 
everything about the confiscation of wealth, but nothing about its creation. 
Worse yet. this new elite thrives in the conditions of chaos and eschews the 
very stability for which the United States so fervently hopes knowing full well, 
as they do, that stability will severely hamper their ability to obtain 
outrageous profits. Consequently, Yeltsin's "reform" government was and is 
doomed to sustain this parasitic political base composed of the banking 
oligarchy. 

The second mistake lay in a profound misunderstanding of Russian 
culture and in the Harvard Institute of Intemational Development advisers' 
disregard for the very basis for their own country's success; property rights. 
It was a very grave error. Private property Is not only the most effective 
instrument of economic organization, it is also the organizational mechanism 
of an independent civil society. The protection of property, both of 
individuals' and that of a nation, has justified the existence of and a 
population's acceptance of the modem state and its public levies. 

Russian property rights are tricky; property has never been 
distributed, but only confiscated and awarded on a cyclical basis. For the 
big players property exists, as It always has, <\>only</\> where there is 
power. For the common man, the property right hasn't advanced much 
beyond custom which prevents the taking of any man's shelter, clothes or 
tools so long as continuous usage is demonstrable. An additional, purely 
Slavic feature of the Russians' concept of property is the shared belief that 
each has a claim upon some part of the whole. 

In ancient 'Rus, property existed for the individual as a claim - or an 
entitlement if you will - to a shared asset, a <\>votchina</\> or "estate", held 
by all the members of a particular clan. This understanding of property still 
informs the culture; though Westemers bemoan Moscow mayor Yury 
Lyuzhkov's retention of the system of the residential permit ("propiska") as 
an impediment to a flexible labor force, the policy is one of Lyuzhkov's most 
popular. Muscovites are well-satisfled with a mayor who polices outsiders 
as they believe any proprietor of such a great estate as Moscow should. 

The Russians' failure to accept the Roman concept of private 
property has compelled them to suffer the coercive powers of the state so 
that at the very least a civil order, if not a civil society, might be established 
and sustained. The hackneyed idea that Russians have some special 
longing for tyranny is a pernicious myth. Rather, they share the common 



278 



human need for predictable event undergirded by civil and state institutions 
and their difficult history is the result of their struggle to achieve both in the 
absence of private property. 

Since only the Tsar or the Party had property, no individual Russian 
could be sure of long-term usage of anything upon which to create wealth. 
The property right matters most of all to the poor because property is the 
poor man's ticket into the game of wealth creation. The rich, after all, have 
their money and their friends to protect their holdings, while the poor much 
rely upon the law alone. 

In the absence of property, it was access - the opportunity to seek 
opportunity - and favor in which the Russians began to traffic. The 
connections one achieved, in tum, became the most essential tools a human 
being could grasp, employ and, over time, in which he might trade. Where 
relationships, not laws, are used to define society's boundaries, tribute must 
be paid. Bribery, extortion and subterfuge have been the inevitable result. 
What marks the Russian condition in particular is the scale of these 
activities, which is colossal. Russia, then, is a <\>negotiated<l\> culture, the 
opposite of the openly competitive culture productive markets require. 

Ironically, the nontransferability of the <\>votchina</\> system's 
entitlement was the very flaw a shareholding culture and an equities market 
could have addressed successfully had Lenin's revolutionary dictum of 
"Property to the people! Factories to the workers!" been realized. <HREF 
A> www.bookagency.com/oiigarchy8i.htmi >And such a program existed. </A> It was 
designed by Larisa Piasheva, a free market Russian economist who was 
appointed by Moscow mayor Gavriil Popov to design and execute a program 
for the privatization of Moscow's assets. Ms. Piasheva's program was a 
feariess and rapid plunge into the market which would have distributed 
property widely into Russia's many eager hands. Further, the program - 
inspired as it was by the policies of Werner Erhard and his adviser, the 
renowned Austrian economist Wilhem Ropke - did not rely upon Western 
lending but instead tailored itself to maximize direct Westem investment. 

When the Administration says it had no choice but to rely upon the 
bad actors it did select for American largesse. Congress should recall Larisa 
Piasheva. How different today's Russia might have been had only the Bush 
Administration and the many Westem advisers from the IMF, the Worid 
Bank, the Intemational Finance Corporation, the European Bank for 
Reconstruction and Development and the Harvard Institute of Intemational 
Development then on the ground in Moscow chosen to champion Ms. 
Piasheva's vision of a rapid disbursement of property to the people rather 
than to the "golden children" of the Soviet <\>nomenklatura.</\> 



279 



Instead, after robbing the Russian people of the only capital they had 
to participate in the new market - <HREF 

A> www.worldnetdaily.com/blueslcy Williamson/ 19990901 xcawi inconve.shtml >the nation's 

household savings </A> - by freeing prices in what was a monopolistic 
economy and which delivered a 2500% inflation in 1992, America's "brave, 
young Russian reformers" ginned-up a development theory of "Big 
Capitalism" based on Karl Marx's mistaken edict that capitalism requires the 
"primitive accumulation of capital". Big capitalists would appear instantly, 
they said, and a broadly-based market economy shortly thereafter if only the 
pockets of pre-selected members of their own ex-Komsomol circle were 
properly stuffed. Those who hankered for a public reputation were to secure 
the govemment perches from which they would pass state assets to their 
brethren in the nascent business community, happy in the knowledge that 
they too would be kicked back a significant cut of the swag. The US-led 
West accommodated the reformers' cockeyed theory by designing a rapid 
and easily manipulated voucher privatization program that was really only a 
transfer of title and which was funded with $325 million US taxpayers' 
dollars. 

Voucher privatization's conceits were compounded by a grievous 
insult; unregulated voucher investment funds, which the privatizers 
encouraged the uncertain Russian citizenry to patronize. Hundreds and 
hundreds of investment funds simply walked with their clients' vouchers, 
reselling them to domestic criminals, Red Directors, western investment 
banks and international money launderers. In other words, the lion's share 
of Russian money laundering occurs when capital enters the country, and 
what we see today in the Bank of New York scandal is, in fact, properiy 
understood as capital flight. When the 18 month-long thieves' banquet that 
voucher privatization was concluded in July 1994, the program, whose very 
design left the controlling shareholding of any single enterprise in the hands 
of the state, had actually institutionalized the state as the determinant owner 
of all that had formeriy belonged to "the people". 

Co-temporaneously with voucher privatization, an eariy and 
precipitous Bush Administration initiative was coming to fruition. In early 
1992, the "Bankers Forum" project was wheeled into place by a former New 
York Fed chief, Gerald Corrigan, who at George Bush's direction sent in a 
group of experts from the Fed, commercial banks and the Volunteer Corps 
on an off-the-books mission to teach the Russians at the Central Bank the 
bond game. Moscow-based Dialog Bank's Peter Derby, who explained the 
project's background remarked, "Basically, when Corrigan asks, I guess no 
one tums him down, because people reacted instantaneously. It was done 
by <l>private investors</l>, who were asked by <l>a person you can't say 
no to" (my emphases). 



280 



The improbable yields (290% on 3-month paper at one point) on the 
Russian market's GKO instruments were paid with US taxpayers' money via 
IMF loans. Guess where all investment went? By yielding those kind of 
non-market returns, the bond market insured that all the country's resources 
and all that it was capable of attracting went to the support of the state, just 
as Tsarism and Communism had done previously. 

So lush were the bond market's rewards that dubious market 
participants included the Russian Central Bank itself through an off-shore 
firm known as Fimaco. The involvement of the Harvard Institute of 
International Development's [HMD] honchos in the same conflict-of-interest 
activities has already been admitted publicly and remains the object of a 
Boston grand jury's scrutiny. The Harvard Management Corporation, which 
invests the university's endowment, was also an avid purchaser of Russian 
bonds, a dubious and unsettling history since there is no legal separation of 
HMC and the university itself. According to the Russian Interior Ministry's 
Department of Organized Crime, Western employees of Russian banks, 
Western bankers and consultants, Russian bankers and anecdotal 
evidence, other likely participants include certain employees of the U.S. 
Treasury, of the multilateral agencies (most especially the World Bank's 
Moscow offices), of bilateral aid agencies, and policy and program 
consultants acting through accounts established in their wives' maiden 
names with non-U. S. reporting brokerages in Moscow. Even the Ford 
Foundation's Moscow office sponsored its own internal Russian bond shop 
for which the unthinking Russian managers once asked this reporter to drum 
up U.S. investors. 

One particularly striking aspect of Bill Clinton's presidency is how 
aggressively his administration has worked to capture the political support of 
the financial sector, offering up heretofore unseen gobs of government favor. 
(A disproportionate number of firms receiving OPIC guarantees, Export- 
Import bank lending, and IFC and Russian Enterprise Fund participation 
were generous contributors to both Clinton campaign coffers and the DNC.) 
The basic formula was simple, it's not the rocket science Russia's Harvard 
advisers intimated it was: The bread and butter of all equity markets are 
bonds. Wall Street wanted a debt market. You build it and we'll come, they 
said. 

The aid program delivered best it could what was in reality a flimsy 
contrivance, which - in turn - was really only an exotic venue through which 
to pass public funds to select Russians of the Clintons' and HMD's choosing 
and to Wall Street investment banks the Clintons hoped to entice 
permanently into their orbit of supporters and contributors. In short, <HREF 

A> www■worldnetdaily■com^lueslcy exnews/ 1998007 xex an imperial ■shtinl >the RuSSlan 

bond market</A> was the Arkansas Development Finance Authority gone 
international. 



281 



Today the Clinton Administration's chief defense for their hand in 
Russia's min is that somebody had to keep the communists at bay. But 
there were no communists In Russia by late 1991. only nascent investment 
bankers looking to nail down a stake any which way. Communism had 
evaporated by late 1987, the year in which the Russian people were allowed 
to hold convertible foreign currencies. Overnight, the power of money 
displaced the power of ideology. 

Though some now say the loans-for-shares privatization program 
marked the reformers' fall from grace, but I beg to differ. On 14 September 
1991, Vladimir Shcherbakov, the last First Deputy Prime Minister of the 
Soviet Union, formed with two other partners, one of which was the now 
notorious Austrian fimri, Nordex GmbH, the International Foundation for 
Privatization and Private Investment [FPI]. FPI's charter was legitimized by 
Gorbachev's signature and approved by 13 heads of what were still 
constituent republics. 

In an interview published in a 1993 issue of VIP, the vanity organ of 
the commercialized <\> nomenklatura. </\>, Shcherbakov reported excellent 
relations with the new regime of "eager young reformers" - Gaidar, Chubais 
et a! - and their leader Boris Yeltsin. All hail-fellows-well-met. So too did 
FPI enjoy similariy sympathetic connections to <\>the EBRD, the IMF and 
the UN Industrial Development Organization. <l\> Shcherbakov even 
boasted about FPI's "new approach to the problem of the property of the 
Western Army Groups in Eastem Germany that comes down to its joint 
exploitation by Russian and German businesses", an eyepopping admission 
worthy of considerable note since a year after the interview was published, 
<\>the<l\> Russian scandal was Bonn's claim that Soviet weaponry sales to 
rogue regimes originating in the Westem Army Group had amounted to a $4 
billion criminal take. 

A former employee of FPI, speaking through clenched teeth, 
reported, "It's [FPI] not a well-known organization, but it's one of the most 
wealthy and most powerful organizations in Russia," and their work was 
engineering commission-paying deals for money or privilege with the 
Kremlin, thereby organizing a pipeline of tribute typical of corrupt regimes. "I 
can't say it publicly, I can't prove my position with documents, but I know 
they were privatizing companies, the very best companies, before we had a 
privatisation program." 

The CIA has been detemnined that through Nordex, FPI seized the 
export eamings from Russia's natural resource companies - oil, gas, 
platinium, gold, diamonds - and from industrial fimns exporting items such as 
steel and aluminum and then stashed the outrageous profits in Westem 
bank accounts. And only now, eight years almost to the day later, do US 



282 



taxpayers learn that the "eager, young refomers" to whom their resources 
were sent for the purpose of building a new Russia were in league from day 
one with the exhausted Soviet <\>nomenklatura</\> in a scheme to loot 
Russia's wealth and park it in the West. 

Yegor Gaidar insists to this day, John Lloyd was good enough to 
remind us in his recent New York Times Sunday Magazine article, that "he 
had no choice but to let prices rise to increase supply and to scrap trade 
barriers so that foreign commodities could begin to fill store shelves." 

Gaidar's assertion is untenable. The Soviet Union was economically 
self-sufficient except for bananas, coffee and coconuts. Foreign 
commodities weren't required to fill Soviet shops. And even though the ruble 
was not convertible, that characteristic had nothing to do with the sudden 
shortages in late autumn 1991, which were only slightly worse than those 
normally encountered in the last thin years of Gorbachev's 
< I >perestroika</\>. 

No one had stopped producing, but shops were suddenly neariy 
empty. Producers had begun hoarding, as had fearful consumers, but why? 
It wasn't that Yeltsin announced in November 1991 that the government 
intended to free prices, it's that he also announced <\>the exact date</\> on 
which prices would be freed. Predictably, producers withheld their product 
from market and rubbed their hands together like flies awaiting the coming 
feast which Yeltsin's newly announced policy guaranteed. Within a week of 
the ill-considered speech, Muscovites' needs were being rationed. 

However, Gaidar really was under pressure, but the pressure was 
coming from the West to open Russia to unrestricted imports in retum for 
multilateral lending. Gaidar soon delivered a trade policy that was 100% 
back-to-front, accommodating as it did the self-serving demands of both the 
West and Russia's nascent banking oligarchy; Russian manufacturing was 
to take the brunt of unrestricted foreign competition, but domestic banking 
was to be protected from competition! Even Russian Central Bank 
Chaimian Viktor Gerashchenko protested, but the Russian bankers were 
accommodated and the IMF continued lending. So much for the "leverage" 
foreign policy elites claim foreign assistance programs provide the U.S. 

In 1991, there was no hope whatsoever that wheezebag Soviet 
industries could compete with Westem products. For decades, prices were 
set by <l>Gosp/an</l> (State Ministry of Central Planning), any enterprise 
profits were claimed as Soviet tax revenues, all customer bases were 
guaranteed and therefore no enterprise had a financial incentive to compete. 
Without competition, there was never any need to improve quality. 



283 



How could freeing prices alone change this equation? Free prices 
only work to the benefit of consumers when producers compete with one 
another in the marketplace to satisfy customers' demands, leaving 
consumers postitioned to reap the most benefit at the lowest price. Clearly, 
an equitable and transparent privatization that would have delivered property 
widely to Russia's many eager hands should have preceded the freeing of 
prices. And during privatization, native producers should have enjoyed some 
protectionism at least, as did developing American industry and manufacture 
in the 1 9*^ century. 

Competent advisers would have known Russia never did develop an 
effective banking sector and system of credit in a 1000 years of her history. 
The story of Russian banking - ancient and modem - always has the same 
plot, only the names and the dates change. S.Y. Borovoi's easily obtained 
history of 18*^ century banking outlines a typical episode involving a certain 
"Suterland, who received 2 million pounds for transfer to London, but instead 
lent the sums to Prince Potyomkin (800,000), Finance Minister Vyazemsky, 
Foreign Minister Bezborodko and even to the future emperor Pavel. The 
debt of these honorable people was, <\>according to the custom</\>, 
forgiven and paid by the state." 

Certainly eager Westem banks should have been given admission to 
Russia. By working initially with more developed and well-capitalized 
Westem banks and later by competing with them, Russian banks could have 
developed quickly and today be mediating capital responsibly and profitably. 
No good economic purpose was achieved by foisting subsidized billion dollar 
loans onto Russia for the purchase of Westem consumer goods. 

Once the crime of voucher privatization was fully realized, thereafter 
ensued a years-long highly-criminal and oftentimes murderous scramble for 
hands-on control of the enterprises. Directors stashed profits abroad, 
withheld employees' wages and after cash famine set in, used those wages, 
confiscated profits and state subsidies to "buy" the workers' shares from 
them. The really good stuff - oil companies, metals plants, telecoms - was 
distributed to essentially seven individuals, "the oligarchs", on insider 
auctions whose results were agreed beforehand. Once effective control was 
established, directors - uncertain themselves of the durability of their claim to 
the newly-acquired property - chose to asset strip with impunity instead of 
developing their new holdings. 

Unsurprisingly, the entire jury-rigged effort has collapsed in flames. 
The bond market has gone bust, Russia is crushed by her IMF loan 
payments, and OPIC's neariy $2 million in U.S. taxpayer-provided 
guarantees are yet to be resolved. The West's best course under whatever 
new govemment the Russian people elect is to take its own advice, stop 
meddling, cease all subsidies and allow what few market mechanisms that 



284 



do exist in Russia to work. The sooner the banking industry's 
<\>pylesos</\> ("vacuum cleaners") are allowed to fail, then the sooner the 
national property can return to market where more able and productive 
hands might yet grasp it. 

Until Russians have resolved for themselves how property is to be 
held and secured their decision <l>de jure,</\> all the destnjctive economic 
arrangements and cultural behaviors crowding Russian history will continue. 
Wealth will not be created without private property; without transferable 
property secured legally to protect no Russian will pay taxes; without 
revenues no Russian govemment can endure without falling back upon what 
is every state's final reserve; coercion. 

The years-long sugarcoating of what the Clinton administration's 
policies have wrought in Russia is just one more lie bequeathed Americans. 
More Western money will only work to insure the continued degradation of 
Russia, bequeathing her people a future that can be discerned in that most 
familiar object of Russian folk culture - the Matryoshka nesting doll - a 
perfect, visual metaphor of Russia's Brechtian universe: Each figure is 
captive, one inside the other, and in the end the biggest doll consumes the 
lot. 

Turning to the question of the IMF and the World Bank generally and 
their specific roles in intemational finance, much needs to be said. When 
libertarians say that government produces nothing, they make a serious 
error. Government produces one thing in abundance - our money. US paper 
fiat dollars have no intrinsic value and circulate only by faith and by edict. 
Consequently, the dollar in a baby boomer's pocket is worth but the penny 
that was in his grandfather's purse less than a century ago. But granddad's 
penny was one hundredth of a gold-backed dollar's value, while today's 
dollar is the product of a government-operated pyramid scheme. Once the 
state slipped the "golden handcuffs" of budgetary discipline through the 
establishment of the Federal Reserve System, it gained the ability to create 
unlimited debt, thereby claiming for itself what before had been the purview 
of tyrants - the ability to debase the currency. It is the slow leaching of value 
from the US dollar, not the far lesser sums raised by direct taxation, which 
has enabled the political class to purchase votes for its re-election. The 
degradation of American society since 1971 is often remarked upon. 

Any pyramid scheme remains viable only so long as its base 
continues to expand and it is that fact which has driven US foreign policy for 
much of the past century. Since politicians and investment bankers both 
have an interest in promoting deficits and in forcing taxpayers to redeem 
govemment debt, they were quick to come to terms on the advantages of 
underwriting foreign debt along with new markets and natural resources 
from abroad. Taxpayer-subsidized globalism then is not a new phenomenon, 



285 



but it has reached an apogee of sorts under the guiding hand of the current 
Clinton Administration. 

Once the criminal financial flows from Russia and Asia were 
combined with the easy money common to presidential election cycles and 
began pumping into the economy in the spring of 1995, it wasn't long before 
asset inflation hit US corporate share valuations. Throughout 1995 and 
1996, the money supply kept rising, and along with it mutual fund holders' 
paper wealth. Attracted by the double-digit yields found in risky, unregulated 
environments abroad, the banks - given the election year liquidity the Fed 
wished to export - lent unwisely and to excess. The moral hazard the 1995 
$40 billion bailout of Mexico unleashed (the debt was refinanced, not repaid, 
with additional IMF lending and proceeds from eurobond sales in 1996) led 
to a tripling of international capital flows. Investors took greater and greater 
risks in the belief that the "new paradigm" promised taxpayer-provided 
redemptions if necessary. The consequence of all those dollars frolicking in 
exotic locales is a $141 billion bailout for Asia, more than $20 billion for 
Russia in 1998 alone, and $30 billion for Brazil in 1999. 

Cures under discussion all share one quality; each has some aspect 
that degrades American citizens' independence and prosperity. It is one 
more irony of the post-cold war environment that ambitious American 
policymakers, who were so busy "reforming" Russia in the most appallingly 
cavalier and self-serving fashion, failed to honor the lesson Russia has to 
teach, i.e. liberty and empire do not cohabit. 

The 1930s were the last era in which the international political and 
financial elite sought advantage through control of the global economy. What 
economists call "hot money" raced from one nation to the next throughout 
that era, leaving a trail of competitive currency devaluations in its wake. Six 
decades ago, as nation after nation was humbled by and strangled with the 
manipulations of the financial world's insiders, history saw fit to serve up 
Adolph Hitler. 

A world war and a score of years later, the allies established the IMF 
as a prophylactic money bag to prevent destabilizing trade imbalances and 
therefore, they thought, a repetition of the preceding decade's nightmare. 
Yet over half a century later, the IMF, the World Bank and their similarly US- 
controlled spawn - the IFC, the six regional development banks and the 
EBRD - have become 800-pound gorillas of economic distortion and, over 
time, of pillage which unchecked will guarantee extensive international 
conflict and a broadly-based anti-Americanism. 

During the Cold War, the International Monetary Fund got itself 
repeatedly into all sorts of financial and ethical mishaps in the West's effort 
to contain the Soviet empire. But the IMF's excesses were of little concem 



286 



so long as its financial firepower could be directed at whatever nation 
appeared on the verge of toppling into the Soviet camp. 

No longer serving in an arguably wasteful manner what was 
nonetheless an agreed national purpose, the IMF has come to function 
increasingly as the personal gift of the office of the US Treasury courtesy of 
that office's service to the US presidency. The US-dependent IMF has been 
well pleased; far easier to serve a single master than answer to a committee 
of Congressmen such as yourselves. 

The ascendancy of Treasury In foreign policy at the State 
Department's expense is the result of a neo-mercantilist foreign policy in 
which enterprise is to be subject to direction from the presidential 
administration it is to serve. By expanding the mandates and accelerating 
the use of a host of intemational agencies in which the US is dominant - the 
IMF, the World Bank, the EBRD, the regional development banks, the IFC - 
and combining their efforts with those of the Commerce Department, the 
Export-Import Bank, OPIC and USAID-financed Enterprise Funds, the 
Clintons succeeded in constructing an intemational patronage machine in 
which the American executive stands supreme. 

Today the president's men are seeking to institutionalize the 
socialization of private investors' and global bankers' risks in intemational 
markets via a freshly-capitalized IMF. The price of the US's $3.5 billion 
contribution to the proposed IMF bailout fund on top of another requested 
$14.5 billion was said to be insignificant when weighed against the financial 
calamity of a worldwide recession that IMF ministrations and policing could 
avert. But how true is this? 

Taking the IMF's behavior in Russia as a guide, the answer is that we 
can expect a rapid escalation of taxpayers' liabilities in the service of failed 
policies. After the chaos unleashed by the Fund's initial advocacy of a single 
ruble zone for the Commonwealth of Independent States, which handed 
management of the ruble to 12 central banks, the Fund's monetary sages 
settled down to their more usual business of lending large sums in retum for 
secret, IMF-designed recovery programs always said to be strictly enforced. 
In Russia's case, only the rhetoric of strict conditions was enforced. 

For example, when the IMF touted a 1996 $10.2 billion loan on the 
basis of what an extraordinary job Russia had done in meeting the 
conditions of a 1995 $6.7 billion loan, one cmcial detail went unmentioned. 
The $6.7 billion loan was extended without any conditions via the IMF's 
Systematic Transformation Facility, a program designed to funnel money to 
Russia in return for Ihe promise to reform". Also left unsaid was that through 
the magic of money's fungibility, the $6.7 billion loan financed - almost to the 
kopeck - Yeltsin's bloody and disastrous assault on Chechnya. 



287 



Following the Russian Connmunists' success in the December 1995 
parliamentary elections, the Fund proceeded into even dodgier territory with 
the 1996 $10.2 billion loan, which came front-loaded with a billion dollars 
meant for Yeltsin's re-election. In return, tape recordings of conversations 
between Mr. Clinton and Mr. Yeltsin made public demonstrate that longtime 
Clinton supporter and campaign donor Tyson's Chicken's business of 
exporting chicken to Russia - a $700 million annual business - was 
protected from a threatened 20% tariff increase. 

Once the first tranche's payout of a billion plus dollars arrived the 
following May, Yeltsin pulled out all the stops; back wages for state 
employees and pensions were paid, and after the IMF's billion was 
consumed, the capricious Siberian ordered his initially mulish Central Bank 
to hand over a billion more. The IMF said nothing despite claiming the 
Fund's main achievement in the past 6 months was legislation establishing 
the Russian Central Bank as an independent institution. Therefore, the 
Fund's current denial of any knowledge of the Russian Central Bank's 
offshore operations through Fimaco are dubious. 

But weren't Americans told that Russia's financial oligarchy paid for 
Yeltsin's re-election? To the contrary, Russia's bankers made serious 
money on Yeltsin's electoral weakness by buying govemment bonds at 
distressed prices using cheap money handed over from govemment 
deposits. The lion's share of the domestic bonds' high yields have always 
been paid with IMF loans. Russia's first representative to the Worid Bank, 
Leonid Grigoriev, explained, "Of course, the government was to return this 
money and that is why the yields on 3-month paper reached as much as 
290%. The government's paying such huge, impossible rates on treasury 
bills, well, it's completely unbelievable. It had nothing to do with the market 
and therefore such yields can only be understood as a payback, just a 
different method." 

Cleariy, building an empire of finance capitalism is an expensive 
business. But who pays? US taxpayers and Russian workers, who paid 
indirectly by having their wages go unpaid and their national estate 
continually degraded. Secondly, the Russian people paid by being denied a 
means of exchange since the banking and trade sectors of the economy 
were quick to socialize amongst themselves what few rubles the IMF's tight 
money policies allowed the Russian Central Bank to print. 

"The new paradigm" economy concocted by the Harvard-connected 
Clinton Administration appointees in the US Treasury, was designed to 
extend the federal government's meddling hand woridwide through its 
control of the multilateral and bilateral public lenders, enabling govemment a 
free ride on the back of a re-structured U.S. economy grown vigorous and 



288 



ever more innovative on account of the benefits the Reagan era's low 
taxation, moderate inflation, reduced regulation and expanding world trade 
had delivered. The overall scheme works as follows: 

Sell assistance programs on an alleged "^ree market" and 
"humanitarian" basis by awarding govemment grants to those academics 
who can be relied upon to supply the intellectual camouflage politicians and 
journalists then repeat <\>ad nauseum<l\> to a distracted public, move the 
IMF and the World Bank to target, induce target to raise taxes, fine tune 
target's central banking operations, encourage borrowing and debt creation 
through the target's govemment and its national banks, allowing IMF lending 
to pay yields if necessary; induce target to privatize national property while 
building a flimsy, artificial "infrastaicture" for an equities market good enough 
to attract high risk foreign investors. Once the target nation's govemment 
flounders, step back and watch speculators assert discipline through a mn 
on the target's currency. The subsequent devaluation delivers, in turn, a 
flood of cheap imports to American manufacturers and producers. 

The finishing touch on the swindle is to confiscate more money from 
G-7 citizens (the lion's share from Americans) to pay for what is said to be 
an "essential" IMF bailout; thereby allowing Uncle Sam's IMF minions to 
entrench themselves more deeply in the target's govemment. Taxes are 
raised, the population struggles beneath indebtedness, govemment funding 
demands and the inevitable domestic inflation a devaluation delivers. 
Western neo-colonialists then bully the target over its rapidly compounding 
debt in order to extract yet more property. Once successful, the worid's 
insiders then turn around and deliver cheap shares from privatizations and 
initial public offerings into the maw of US mutual funds and portfolio 
investors. US taxpayers get hit coming (foreign aid) and going (bailouts) 
and innocent foreigners' property is finagled away either from, or on account 
of, inattentive and corrupt leaderships. The big winners are the worid's 
increasingly corrupt and cozy governing class, international bureaucracies 
and global banks. 

What US policy has wrought across much of the post-cold war 
landscape is a moral, political and financial abomination based on fraud, 
theft and deceit. In Russia the results of the Clinton Administration's policies 
are the perpetuation of the longest depression of the 20th century in what is 
increasingly an unpoliced deadly weapons dump, the biggest swindle of 
national property since Vladimir Lenin muscled the country eariy in the 
century and the discrediting of the ideas of free markets and democracy. 

But as the old saying has it, what goes around comes around. 
Unfortunately, all those dollars the Fed printed to get Bill Clinton re-elected 
in return for Alan Greenspan's third appointment as central bank chief, are 



289 



now returning to the United States in the fomn of manufactured goods and 
commodities with which U.S. producers can not compete on price. 
When exchange rates fluctuate against one another as they do now, some 
countries will inflate more quickly than other countries. The G-7 are the only 
nations that try to co-ordinate their monetary policies and the effort usually 
ends up a failure over time. When one country inflates too quickly, the value 
of its currency will decline. 

Some governments - especially those with an election on the horizon 
- actually want to devalue since national exporters, their goods now being 
cheaper, sell more goods. Global lenders like the IMF are also fond of 
devaluations because a rising national income from bargain exports leave 
plenty in the national kitty for principal and interest payments to them. 
(Global direct investors who stick to the dollar, quasi-"good guys", fear 
devaluations, because their profits calculated in a devalued domestic 
currency buy fewer dollars for repatriation.) 

But when exchange rates depreciate rapidly the specter of capital 
flowing out of a country appears. Foreigners and residents put their savings 
elsewhere. The currency goes into free fall, its value plummets, more 
investors flee and at the end of the cycle, interest rates skyrocket. This is 
exactly what happened in Asia in 1997, in Russia in 1998 and in Brazil in 
1999. 

Yet to curse the speculators is useless; since the 1972 collapse of 
Bretton Woods that broke the international link between the dollar and gold, 
the fear of the syndrome described above is the only remaining bit of 
discipline in the international system. How much better, the globalists 
reason, if there were to be one central bank and one fiat currency for 
everyone so that then national leaderships (and the financial oligarchies they 
sustain) could inflate and rob their own populations in unison. 

In time, U.S. corporate profits will decline as a consequence of the 
IMF-induced deflation and share prices of all but premiere multinational 
corporations will follow suit. Alas, those Americans up to their necks in 
credit card debt may well be the next class of debtors to be rolled, and 
American farmers have been suffering for some time from the collapse of 
farm commodities. In time, credit will dry up, govemment receipts will 
dwindle, the national debt will skyrocket and unemployment will increase. 
Eventually the government will inflate its way out of its accumulated debt. 

Before concluding my remarks. I would like to recall one curious and 
mostly unremarked detail from 1994, that sticks out in this sad story like a 
boy's unruly cowlick. In mid-July 1994 - at the very moment dollar-based 
Mexican tesobonos were being oversold to prosperous clients of Goldman 
Sachs and other U.S. investment banks, which, in turn, would lead to the 



290 



1995 Mexican bailout and the introduction of moral hazard into the world's 
financial system - Michel Camdessus told a press conference that he 
intended to press for the creation of a new IMF facility to give members 
resources with which to defend themselves against speculative attacks in 
financial markets. 

In other words, long before bailouts of entire countries became 
routine Camdessus wanted a new loan program to feed the last 
disciplinarians in the worid's financial system - currency speculators - so that 
national govemments might become even more unaccountable to their 
citizens. At the time, The Economist slammed the proposal, saying it was 
"absurd and almost certainly unworkable," since Camdessus "bizarrely" was 
assuming the IMF would know more about economic fundamentals than the 
markets. And that assumption. The Economist noted, was the very 
assumption which had been the undoing of the USSR's centrally planned 
empire. But Camdessus' 1994 plan is the very one the Clinton 
Administration implemented and seeks to institutionalize. 

So who wags the tail of the money dog? Michel Camdessus, a 
French socialist and lifetime bureaucrat, and his deputy, Stanley Fisher, who 
together are quite possibly the two most incompetent people on the planet? 
So it would appear. 

It doesn't take a conspiracy theory to observe that the downward arc 
of citizens' liberties, independence and civic competence and of American 
culture generally parallels the declining value of the U.S. dollar, which has 
lost 99% of its value since the founding of the Fed, and 75% of that 
debasement has occurred since the last link with gold established by Bretton 
Woods collapsed. From that perspective, it's really not very surprising that 
at the end of the century, not quite a century after America instituted the 
Federal Reserve and thereby began the process that would deliver the 
power of creating unlimited debt to the political class, the White House is 
occupied by a couple who share not so much a marriage as they do a 
collection of felonies. 

Throughout the 1990s, finance capitalism's shills have been a "new 
paradigm" economy so glorious one might have thought Beatrice awaited us 
each and every one at the very lip of Heaven itself. Their brassy tune 
celebrated the defeat of the business cycle by globalization, productivity 
gains and computer technology. Inflation was tamed, the golden horns 
sounded, and we were to dwell etemally in lush fields of full employment, 
low interest rates and a booming stock market. And, insiders winked, 
foreign money once mugged by speculators would have nowhere else to go 
but directly into Wall Street's money machine. 



291 



But what if - instead of Beatrice - what waits over our cxjilective 
shoulder down Purgatory way is a repeat of the European currency 
instabilities of the 1930s, which culminated in the most viscious and widely- 
fought war in world history? 

From the perspective of the many millions of her children, Mother 
Russia in late 1991 was like an old woman, skirts yanked above her waist, 
who had been abandoned flat on her back at a muddy crossroads, the 
object of others' scorn, greed and unseemly curiosity. It is the Russian 
people who kept their wits about them, helped her to her feet, dusted her off, 
straightened her clothing, righted her head scarf and it is they who can 
restore her dignity - not Boris Yeltsin, not Anatole Chubais, not Boris 
Berezovsky nor any of the other aspirants to power. And it is the Russian 
people - their abilities, efforts and dreams - which comprise the Russian 
economy, not those of Vladimir Potanin or Viktor Chernomyrdin or Mikhail 
Khodorkovsky or Vladimir Gusinsky. And that is where we should have 
placed our bet - on the Russian people - and our stake should have been 
the decency, the common sense and abilities of our own citizens realized 
not through multilateral lending but through the use of tax credits for direct 
investment in the Russian economy and the training of Russian workers on 
6-month to one year stints at the US offices of American firms in conjunction 
with a free trade treaty. 

Russia is a fabled land, home to a unique and provocative thousand 
year-old culture, and a country rich in the resources the worid needs whose 
people had the courage and resilience to defeat this century's greatest war 
machine. Hitler's invading wehrmacht. Yet, thanks to Boris Yeltsin's thirst for 
power and megalomaniiacal inadequacy, Russia has become the latest 
victim of American expediency and of a culturally hollow and economically 
predatory globalism. Consequently, Americans, who thought their money 
was helping a stricken land, have been dishonored; and the Russian people 
who trusted us are now in debt twice what they were in 1991 and rightly feel 
themselves betrayed. 

The worst of it was that some pretty good ideas - private property, 
sound money, minimal govemment, the inviolability of contract and public 
accountability • that have delivered to the West's citizenry the most 
prosperity and the nfK)st liberty in world history, and might have done the 
sanne for the Russians, were twisted into perverse constructions and only 
then exported via a Harvard-connected cabal of Clinton administration 
appointees who funded - without competition - their allies at Harvard 
University courtesy the public purse. Joining the US-directed effort were the 
usual legions of overpaid IMF/World Bank advisers whose lending terror 
continues to encircle the globe. 

But where, in a land in which today niore of the people die each year 
than are bom, lies the gain? History's yardstick will measure out the 
answer, and I suspect it will riot suit us. 



292 



STATEMEaiT OF 

ABMMID dm BORCH6RAVB 

DIRECTOR OF THE GLOBAL ORGMtlZED CRIME PROJECT AT 

THE CENTER FOR STRATEGIC AND INTERNATIONAL STUDIES 

(CSIS) 

BEFORE THE 
HOUSE COMMITTEE ON BANKING AND FINANCIAL SERVICES 

SEPTEMBER 21,1999 

I am testifying today in my capacity as Director of the 
Global Organized Crime Project at the Center for Strategic 
and International Studies. 

We published our first report on Russian Organized Crime 
and its global implications for U.S. National Security on 
September 29, 1997. Four days before its release. President 
Yeltsin told the upper house of parliament, known as the 
Federal Council, that "criminal elements have entered our 
political arena and are dictating our laws with the help of 
corrupt bureaucrats." 

The Russian Organized Crime (ROC) Task Force is in the 
process of completing a companion report updating the ROC 
situation since the August 1998 crash. The report will be 
released before the end of this year. 

The key findings of the 1997 report: 

• Left unchecked, Russia is in danger of becoming a 
"criminal-syndicalist state" under the control of corrupt 
government bureaucrats, politicians, businessmen and 
criminals with which normal relations would be 
impossible. 

• Russian Organized Crime (ROC) constitutes a direct threat 
to the national security interests of the United States 
by fostering instability in a nuclear-armed major power. 

• Equally ominous is the challenge to national security and 
law enforcement posed by the transnational operations and 
alliances of ROC groups. According to the FBI, ROC groups 
now have relations with their criminal counterparts in 50 
countries, up from 29 countries just two years ago. 
Overall, some 200 large, sophisticated ROC groups are now 
operating worldwide. 



293 



• ROC groups hold the uniquely dangerous opportunity to 
procure and traffic nuclear materials. Russia's former 
Minister of Defense, Igor Rodionov, has indicated that, 
without immediate payment of back wages, "the Defense 
Ministry cannot guarantee that some undesirable and 
uncontrollable processes will not develop in the armed 
forces . " 

• The criminal environment in Russia is often compared with 
the "robber baron" era of 19'*^ century U.S. history. This 
is a false analogy. ROC groups stash untold billions 
abroad and seldom reinvest their ill-gotten gains to 
bolster the domestic economy through the building of 
modern infrastructure. 

• The corruption that pervades every level of Russia's 
bureaucracy is the major impediment to combating OC in 
Russia . 

• The processes of democratization and economic 
liberalization in Russia are being seriously undermined 
by ROC. 

• The erosion of the government by ROC is imperiling 
cooperative efforts in the areas of peacekeeping, non- 
proliferation and economic restructuring. 

• ROC has extended its tentacles throughout Russia's 
economy, which confers an aura of legitimacy to myriad 
illicit activities, including the manipulation of 
Russia's banking system and financial markets. 

• In the absence of effective courts, a working judicial 
system, and consistent enforcement of established 
commercial and contract law, criminal elements have 
become de facto adjudicators. Protection rackets in 
effect have usurped the government's traditional legal 
functions and safeguards. 

• Efforts within Russia to combat OC - by the government, 
the media, and others - have been weak, often sidetracked 
because of fear and bribery, and frequently derailed by 
assassinations . 

The foreword to this report, co-signed by Judge William H. 
Webster, the former FBI Director and Director of Central 
Intelligence, and by me, concluded that, "If the forces of 
organized crime are not stymied, Russia will complete' its 
devolution into a criminal-syndicalist state. The United 
States then would be faced with an agonizing reappraisal of 
its diplomatic and commercial relations with Russia." 



294 



What was a threat then is a reality today. Russia is a 
criminally-focused state from top to bottom. 

The CSIS report on ROC was quickly endorsed by FBI Director 
Louis Freeh but dismissed by high-ranking Administration 
officials even though the intelligence community was well 
aware of the facts. 

The genesis of the Global Organized Crime Project at CSIS 
goes back to 1994 when a wealthy friend of mine with 
extensive Russian contacts at the highest level received a 
telephone call from Moscow asking him to take care of five 
Russians on their way to New York. It soon became apparent 
that the Russian visitors wanted an introduction to a Swiss 
banker in Nassau in the Bahamas where my friend kept a 
house. 

A few days later, the Swiss banker called my friend and 
asked whether he realized what the five Russians wanted. "I 
suppose they wanted to open a bank account," he answered. 
"Yes, but do you realize for how much?" asked the banker. 
My friend guessed a few million dollars. It was $2.5 
billion, which the Russians wanted, deposited in several 
secrecy jurisdictions in untraceable accounts. After 
checking with Zurich headquarters, the Swiss bank turned 
down the business. 

Three weeks later, I was on vacation in the south of France 
and found myself seated at a dinner next to a Swiss banker. 
After recounting the anecdote, he said, "What a 
coincidence. I had a Russian "walk-in" two days ago who had 
no introduction and wanted to deposit $400 million, also in 
untraceable accounts in offshore tax havens. 

1994 was also the year the late Claire Sterling, a much- 
honored investigative reporter, published a book titled 
^^ Thieves World," which documented chapter and verse on the 
global tentacles of ROC. Ms. Sterling had traveled the 
world, including several trips to Russia, to investigate 
the connections between Russian intelligence and security 
agencies, organized crime syndicates, and the so-called 
oligarchs who plundered Russia systematically under the 
guise of privatization schemes. 

There was no doubt in Ms. Sterling's mind that this lethal 
mix enjoyed the protection of the powers that be in the 
Kremlin. 



295 



I also traveled extensively on behalf of CSIS' Global 
Organized Crime Project without using any of Ms. Sterling's 
contacts. We deliberately avoided duplication. From Buenos 
Aires to Berlin, from London to Lugano, from Bogota to 
Beirut, the pattern was identical - countless billions of 
dollars siphoned out of Russia to be laundered before 
buying commercial properties or being used to pay cash for 
lavish private residences in Europe's capitals and in the 
Mediterranean's luxury resorts, as well as to purchase 
yachts and private planes. I discovered scores of examples 
of properties ranging in price from $5 million to $75 
million paid for by Russians in cash. 

Little known outside the intelligence community is the fact 
that the clandestine stripping of Russia's assets began as 
early as 1985 and 1986 when key members of the Soviet 
Communist Party's Central Committee (International 
Department) concluded that President Gorbachev's glasnost 
and perestroika would lead to the collapse of Communism. 
This is when these Central Committee members turned to the 
KGB for assistance in moving abroad precious metals and 
stones and liquid assets. The KGB was the only organization 
familiar with western conduits willing to handle this 
clandestine traffic. 

When the Soviet empire began to implode in 1989, many of 
these Communist apparatchiks and their KGB associates 
became instant businessmen. 

Russia's much touted instant market economics and 
democratic politics were little more than a sham. 
Prosecutor-General Yuri Skuratov ridiculed President 
Yeltsin's seven major crackdowns on organized crime and 
corruption in 1997 as a Potemkin village. "It is a 
charade," Mr. Skuratov said in an interview, "there is 
neither the will at the top nor the resources to do much 
about it." 

Mr. Skuratov was framed in a sex scandal by the security 
service earlier this year and then suspended by Mr. Yeltsin 
for poking around the Kremlin's labyrinthine financial 
structure. But the Russian Parliament twice declined to 
endorse the suspension and Mr. Skuratov continues to speak 
out in interviews. He now says that $3.9 billion of the 
IMF's $4.8 billion loan last year never reached Russia but 



296 



was sold by the Russian Central Bank directly to 18 
commercial banks controlled by the oligarchs. 

The cult of secrecy in Russia's Byzantine politics thwarts 
all attempts at transparency. The rule of law is non- 
existent. Moscow's chief of police said publicly that 90% 
of his officers were on the take. Security services are 
part of the problem, rather than part of the solution. They 
run their own kryshas, or "roofs" of protection, or do so 
in collusion with criminal gangs. Key sectors of Russian 
industry are under the sway of organized crime, 
particularly those that earn hard currency, such as mining, 
petroleum, natural gas and arms manufacturing. 

Former First Deputy Prime Minister and former Interior 
Minister Anatoly Kulikov recently told our ROC Task Force 
at CSIS that about half of the Russian economy is 
controlled by "shadow systems" that run illegal operations. 
Mr. Kulikov estimates the amount of capital flight since 
1992 at close to $300 billion. Some 55 offshore secrecy 
jurisdictions from Vanuatu in the Pacific to island nations 
in the Caribbean and a dozen countries from Bahrain to the 
Bahamas were eager to take in Russia's dirty laundry. 

In 1995 and 1996, about $1 billion a month came into Cyprus 
from Russia and another $1 billion went in and out of 
Israel. The money laundering activities uncovered recently 
by the FBI at the Bank of New York (BONY) are not unusual. 
They have been duplicated by scores of banks the world 
over. Wealthy individuals have parked an estimated $8 
trillion in offshore tax shelters that guarantee secrecy. 
There are also approximately one million corporations 
anonymously chartered in these secrecy jurisdictions that 
sell naturalization and a new passport for $50,000 
(Dominica charges $75,000, including a spouse and two 
children) . 

These facilities make it easy for Russia's 200 plus 
organized crime groups to operate in 58 countries, up from 
50 two years ago, according to the FBI. 

Corruption in the Russian military, where everything and 
anything is for sale, has worsened substantially since the 
August 17, 1998 financial meltdown. Apart from elite 
Special Forces units, it is a beggar's army. Last winter, 
soldiers were told to fend for themselves by scrounging for 



297 



food in the countryside. These dismal conditions in the 
military increase the likelihood of criminal diversion of 
theft of nuclear weapons and/or fissile materials, given 
that Russia still has some 20,000 nuclear weapons. 

The failure of the Russian state is made clear in a just 
published book titled, ^^Money Unmade: Barter and the Fate 
of Russian Capitalism," by David M. Woodruff of MIT. If 
anything, Mr. Woodruff has underestimated the part that 
greed and corruption played in the process of national 
disintegration. Russians have been bitter about how what 
they perceive as American capitalism made them poor (40% of 
the population is now living below the poverty line of $38 
a month); now they are now bitter about being weak. This 
plays into the hands of anti-American ultra nationalists. 

The totalitarian temptation has existed in Russia for the 
past 1,000 years. It is now rearing its ugly head again 
after a decade-long taste of gangster capitalism. 

Last week, Secretary of State Madeleine K. Albright called 
on President Yeltsin to make fighting corruption a top 
priority. The Administration, like Inspector Renaud in the 
movie classic Casajbianca, is shocked that there is gambling 
going on in the Kremlin. "The problem is real and must be 
taken seriously," said Mrs. Albright. The problem has been 
glaringly obvious since 1991 and repeated warnings that it 
was undermining U.S. foreign policy objectives as well as 
diverting U.S. financial assistance and IMF loans were 
repeatedly dismissed as exaggerations. 

It is hardly surprising, therefore, that Russian 
nationalists have convinced themselves that the U.S., not 
content with its Cold War victory, was also bent on 
wrecking the Russian economy. 

The Administration has invariably invoked the need to give 
priority to strategic arms control and economic reforms, 
rejecting the notion that the emergence of a criminal state 
was in direct contradiction with U.S. objectives. 

Gen. Boris Gromov, chairman of the subcommittee on Arms 
Control and International Security of the Duma's Committee 
on International Affairs, said this week that the 
lamentable state of the Russian military was "a direct 
result of western indifference" to the way the Kremlin 
robbed the armed forces of the resources needed to maintain 



298 



cohesion. "Yeltsin's socalled reforms," Gen. Gromov said, 
"have brought nothing to the majority of the Russian 
population but disappointment." 

Saul Bellow once said that a great deal of intelligence can 
be invested in ignorance when the need for illusion runs 
deep. The Administration's need for illusion in its Russian 
policies has been an evergreen commodity since the collapse 
of the Soviet Union. 



299 



Center for Stratebic and Internationai. Studies 









u 



Global Organized Crime Project 



Project Chair: William H. Webster 

Project Director: Arnaud de Borchgrave 

Project Cooirectorb: Robert H. Kupperman & Erik R. Peterson 

Tabk Force Chair: Gerard P. Burke 

Task Force Director: Frank J. Cilluffo 

Task Force Research Assistant: Robert J. Johnston 



C5ZS 



300 



Participants 



Global Organized Crime 
Steering Committee Memt}ership 

Chair 

Wiliiam H. Webster 

Former Director, Central Intelligence Agency 

Federal Bureau of Investigation 

Director 

Amaud de Borchgrave 
Senior Adviser, CSIS 

Project Assistant Director 

Frank J. CUluffo 
Senior Analyst, CSIS 

Members 



Duane Andrews 

Former Assistant Secretary of 

Defense 

(Director d I) 

Robert Bonner 
Former Administrator 
Drug Enforcement Agency 

William Cohen 

U.S. Senator (Ret.) 

(currently serving as Secretary of 

Defense) 

Robert Gates 

Former Director 

Central Intelligence Agency 



Carol Hallett 
Former Commissioner 
U.S. Customs Service 

Admiral James R. Hogg 
U.S. Navy (Ret.) 

Fred C. Ikl^ 

Former Undersecretary of Defense 

Stuart Knight 

Director, U.S. Secret Service (Ret.) 

Patrick Leahy 
U.S. Senator 

William McCoUum 
U.S. Representative 



301 



Steering Committee Members, continued 



General Edward C. Meyer 
US. Army (Ret.) 

SamNunn 

U.S. Senator (Ret.) 

Oliver Revell 

Former Associate Deputy Director 

Federal Bureau of Investigation 

William Roth 
U.S. Senator 

William Sessions 
Former Director 
Federal Bureau of Investigation 

Admiral William D. Smith 
U.S. Navy (Ret.) 



Lieutenant General Edward Soyster 

Former Director 

Defense Intelligence Agency 

J. Chips Stewart 

Booz, Allen and Hamilton 

Richard Thomburgh 
Former US. Attorney General 

R. James Woolsey 

Former Director 

Central Intelligence Agency 

William Zeiner 
Director, Criminal Justice 
MITRE Corp. 



Global Organized Crime 

Russian Organized Crime Tasic Force 

Project Director 

Amaud de Borchgrave 
CSIS 

Task Force Chair 

Gerard Burke 
The Parvus Group 

Task Force Director 

Frank J. CiUuffo 
CSIS 



Task Force Research Assistant 

Robert J. Johnston 
CSIS 



Task Force Members 



302 



Michael Bopp 

Permanent Senate Subcommittee 

on Investigations 

James Brusstar 

National Defense University 

Jack Dziak 
Dziak Group, Inc. 

John Hurley 

U.S. Customs Service 

Eric Lebson 

USAsia Commercial Development 

Corp. 

Nancy Lubin 

JNA Associates, Inc. 

John MacGaffin 

Central Intelligence Agency (Ret.) 

John Martin 
Department of Justice 



Stephen McAlexander 
Federal Bureau of Investigation 

James Moody 

Federal Bureau of Investigation (Ret.) 

Rick Mosquera 

Federal Bureau of Investigation 

Jack Piatt 

Hamilton Trading Group 

Russell Ross 
Department of State 

John Sopko 
Department of Commerce 

Graham TurbiviUe 

Foreign Military Studies Office 

Robert B. Wade 
America Online 



303 



Summary 

of Recommendations 



The Russian Organized Crime Task Force recommends that the following actions 
be taken: 

n ROC should receive public recognition from the president of the United 
States as a national security threat. 

The development of a free market in Russia founded on the rule of law 
should be recognized as the only long-term policy solution for ROC and 
must be central to all U.S. policy decisions. 

O In order to mitigate instances of corruption within the Russian goverrunent, 
U.S. policies and actions should shift from support for political personali- 
ties to support for segments of the Russian government that are working to 
usher in the rule of law. Strengthening the rule of law will foster the emer- 
gence of a viable market economy in Russia, free from the coercion and 
extortion activities of ROC groups. 

D Russia must work toward the creation of a strong and impartial judiciary to 
implement and enforce a fair body of civil, criminal, and contract law co 
regain control over the adjudication role currently played by ROC groups. 

□ U.S. suppxjrt for reform should reinforce training and exchanges such as 
those currently in place, funded through the National Endowment for 
Democracy, the Department of Justice, and the Agency for International 
Development. These programs, as well as similar efforts within the private 
sector and the academic community, should be continued and expanded 
through appropriate funding by Congress. 

□ A similar effort should be undertaken in the private sector to support legiti- 
mate regulation of Russian industry, business, and trade. Specifically, the 
Russian government should be assisted in establishing uniform business 
operation regulations, professional standards for certain industries, and 
requirements for the issuance and regular renewal of business licenses and 
other permits. 

□ Stringent requirements to ensure transparency in Russia's use of foreign 
aid. as well as multilateral loans and export fmancing, should be imple- 
mented and enforced to insulate the funds from OC and to ensure that the 



304 



funds reach their intended destinations. 

I The United States should initiate a discussion at the level of the Summit of 
the Eight of an investment treaty to deny export credits to Western firms 
doing business with OC-controlled firms in Russia. 

Because ROC activity requires a response from multiple U.S. government 
agencies with multiple roles and missions, decisions over whether prosecu- 
tion or foreign policy objectives should take precedence should be made on 
a case-by-case basis. 

Because businesspersons often become the targets of ROC activity, a 
greater effort should be made to provide them with relevant information. 
The Foreign Commercial Service of Department of Commerce in conjunc- 
tion with the Overseas Security Advisory Council of the Department of 
State should work with other U.S. agencies and the Russian government to 
advise and support businesspersons, providing them especially with 
alternatives to paying extortion to criminal elements in Russia. 

A shared public database on ROC, including a collation of declassified and 
open-source materials, also should be created to assist investors from the 
United States and other countries. The database could be supplemented by a 
classified database for use by U.S. government agencies only. Considering 
the transnational breadth of ROC activity, a database supporting intelli- 
gence-sharing among various groups like the P-8, Europol, and the "six 
nation group"* addressing the transnational aspects of the ROC threat is also 
necessary. 

The U.S. intelligence community must be directed to fill the immense intel- 
ligence gaps on ROC. Their elements should use well-tested operational 
know-how and tradecraft to recruit informants inside ROC or induce defec- 
tions from the various ranks of people who can provide hard, inside knowl- 
edge of how the various ROC elements operate, do not operate, cooperate, 
and do not cooperate. 

The interpenetration of Russian officialdom, businesses, and criminal orga- 
nizations make it more imperative than ever that U.S. law enforcement and 
intelligence agencies fully cooperate and share the fruits of their respective 
disciplines to serve U.S. policy, security, and commercial interests more 
capably. 

Close U.S. government identification with corrupt elements of Russia's 
political establishment risks serious popular backlash inside Russia. The 
United States must avoid the appearance of unqualified support for what is 
routinely seen as a kleptocratic establishment. Such linkage reinforces a 



4. The "six nation group" includes the United States, Canada, the United Kingdom, 
Gennany. Italy, and Russia. - 



305 



growing pupuiar pcrccpuon inai aemocrauc political and market economic 
systems are merely code words for rapacious criminality. The United States 
should address this perception by increasing its public diplomacy 
discussion of the causes of and cures for ROC. 

The U.S. government must support not only senior-level reformers in the 
Russian government, but reformers outside government as well. The United 
States should not remain silent in the face of official hostility to respected 
human rights leaders like Sergey Kovalev of the Sakharov Foundation or 
fabricated charges against the environmentalist Captain Nikitin. 



306 



STATEMENT OF WeHHm^^^^TALMER, PRESIDENT OF CACHET 
INTERNATIONAL, INC. ON THE INFILTRATION OF THE WESTERN FINANCIAL 
SYSTEM BY ELEMENTS OF RUSSIAN ORGANIZED CRIME BEFORE THE 
HOUSE COMMITTEE ON BANKING AND FINANCL\L SERVICES ON 
SEPTEMBER 21, 1999 

STATEMENT BY RICHARD L. PALMER 

Mr. Chairman, and other honored members of the committee, I welcome the opportunity 
to address this committee on a subject that presents serious threats to Western nations as 
well as involves the use of US taxpayers' ftrnds to continue the looting of Russia and its 
former republics. I feel reasonably well qualified to speak on the subject as a result of my 
former government service, personal research and professional duties. I have devoted 
much of my time, energy, and money to Central and Eastern Europe and the former 
Soviet Union in the last seven years, because I believed that the collapse of the Soviet 
system was a historic, revolutionary event and that the outcome would shape the course 
of history. Unfortunately, we have thus far squandered our opportunity to help shape the 
outcome of this event into positive directions that benefit the majority of the people in 
this region rather than just a few persons at the top. We have little time left to avoid the 
permanent denigration of the terra "democracy" in this region and the return of 
totalitarian regimes which may not necessarily be Communist. This would lead to 
instability in a region that spans 10 time zones and still remains the second ranking 
nuclear power. 

CREDENTIALS: 

I believe that I should explain my background regarding the technical topics that I am 
addressing today. I served five and one-half years in the US Army, including decorated 
service as an infantry officer in Viet Nam and then as an Army Intelligence Officer in 
Europe. I then served 20 years with the CIA in the Operations Directorate, of which over 
1 8 years of this time was spent overseas, much of the time in Eiu'ope. During my CIA 
service, I had nine years of experience in detecting international money laundering and 
criminal activity. I spent 11 years as Chief of Base and Chief of Station in four different 
locations. I began to study Russian Organized Crime in 1989, when the Berlin Wall 
came down, and I focused on Russian Organized Crime and corruption in my final 
assignment as a Chief of Station in the Former Soviet Union (FSU) fi-om 1992 until 1994. 
I then worked for three years in the FSU as a business and security consultant, as well as 
working as the director of training within one Russian based bank. As a result, I have 
experience based upon direct contact with FSU security and police services, as well as 
members of Russian banking, business. Organized Crime and corrupt officials. I then 
worked in the US as a senior analyst with an international private investigation firm, 
where I specialized in the investigation of financial fi-auds and international economic 
crimes. I am currently the owner of the investigative firm Cachet International, Inc., 
which has offices in Virginia and Washington, DC. This firm specializes in domestic and 



307 



international asset recovery, business intelligence and due diligence investigations - 
especially in the FSU. I organized and directed a seminar in Washington DC on 
"Recovering Assets In and From Russia" in October 1998. In addition to U.S. clients that 
include some Fortune 100 firms, I now also represent several Russian and Former Soviet 
Union (FSU) firms who seek to locate assets of debtor firms in the US as well as off- 
shore banking locations. 

In addition, I am recognized in US Federal Court as an expert witness on Organized 
Crime, Official Corruption and the Banking System in Russia and the FSU In 1997 I 
wrote a monograph and an article in the journal Trends in Organized Crime on the 
looting of the Soviet state which is currently being developed into a book for publication 
in early 2000. I also has appeared on television network nescasts regarding Russian 
Organized Crime and the Russian business environment, and I am an advisor to two 
major US TV networks and several newspapers and news magazines. I have presented 
lectures on the background and history of Russian Organized Crime (ROC) at the 
University of New Jersey, Tufts University in Boston and the California Attorney 
General's International Conference on Russian Organized Crime. I am a consultant to 
several US police agencies concerning Russian Organized Crime. 

I plan to provide examples of the infiltration of Russian Organized Crime into the 
Western banking system based upon my personal and professional research. In 
compliance with the laws for Private Investigators in Virginia as well as with my 
contractual obligations, I will not identify any of my clients. 

KEY POINTS: 

• Several powerful organized criminal groups exercise control over national economy. 

• The corrupt government and law enforcement agencies serve as tools for Organized 
Crime groups; and, the Chiefs of state of those countries are unable and unwilling to 
fight Organized Crime and corruption. 

• There is still a severe shortage of democratic institutions and mechanisms, paralysis 
of the legal system. 

• The market mechanisms are suppressed by Organized Crime. 

• As is illustrated by the figures shown above, most informed observers agree that the 
criminal Mafiya groups account for only about 10 to 15 % of the makeup of 
Organized Crime, with Russian officials, former officials and their "newly created 
entrepreneurs" accounting for the other 85 to 90 %. In other words, the criminal 
Mafiya groups with ostentatious cars, bodyguards and flashy attire are only the most 
visible portion of Russian Organized Crime (ROC) and are possibly much less 
dangerous than the more hidden "official" members of Organized Crime - whom the 
West consistently attempts not to see. 



OVERVIEW OF THE CURRENT PROBLEM: 



308 



In essence, most complicated financial crimes are basically very simple. (The Wall Street 
Journal of September 5, 1999 "A Scheme for Ducking Taxes May Be a Key In Russia 
Money Probe' presents an excellent, detailed look at the persons and systems involved.) 
For example: the background details of the current investigation regarding the alleged 
money laundering through the Bank of New York (BONY). Two apparent non-banking 
experts set up a system to simply move large amounts of money from Russia to the US 
and frequently on to third countries. It seems rather clear that - at a minimum - the BONY 
and several other Western banks skirted the legal requirements enlisting their active 
assistance in preventing money laundering. One crucial legal prerequisite to prove money 
laundering is to demonstrate that the provenance of the money being transferred or 
deposited was illegal. It seems that the BONY case meets this criterion and this is why: 

From published accounts, it appears that Benex and similar "money transfer" firms 
utilized contacts (or in this case relatives) in the BONY to assist in keeping this "money 
transfer" operation from being "discovered". Less charitable accounts, such as of the 
New York Post article of August 28, 1999 " TAPE: BANK OF N.Y. BIGS KNEW OF 
RUSSIAN SCAM " argue that Ms. Natasha Gurfinkel Kagalovsky actually took 
instructions from a Vice-President of Inkombank regarding the backdating of documents 
to avoid attracting the attention of U.S. Treasury Agents (FinCen). If that account is 
proven to be true, it would indicate that even a Vice-President of Inkombank, a 
"priviledged" Russian bank, is so familiar with the criteria used by FinCen that he can 
easily "adjust" transactions so as not to alert US law enforcement to any irregularities. 
While no one can be certain about this accusation until it is proven in court, I would like 
to note that, while examining eleven cases of US and other Western firms being 
defrauded by Russian Organized Crime (ROC) elements, I was able to identify nine cases 
where USAVestem executives had clearly been suborned by ROC groups to assist in 
looting their employers. (It is also well known that Ms. Natasha Gurfinkel Kagalovsky is 
the wife of Mr. Konstantin Kagalovsky, a member of the board of directors of Menatep, 
another "priviledged" Russian Bank, and former Russian representative to the IMF.) 

Following the financial crisis in Russia in August 1998, both Inkombank and Menatep 
Bank were declared bankrupt and their assets were supposed to have been frozen. I 
represented a few of the more than two dozen Western firms that sought to trace the 
fransfer of funds by the supposedly insolvent Inkombank and Menatep Bank to Western 
accounts where they could be legally attached. This is the normal part of the legal 
restitution of funds that Western firms lost in investments or transactions in Russia. These 
fiinds were actually easier to track outside of the US. It now appears that this is because 
these Russian banks were using the size, speed and efficiency of the US banking system 
to avoid detection. In other words, the Mafyia infilfrated Russian banks used the US 
banking system to prevent US and other Western businesses from obtaining legal 
restitution of funds lost in Russia. 

The problem of obtaining legal restitution funds from Russian banks and companies has 
three other components: 



309 



First of all, Russia is not governed by the "rule of law" but functions under the rule of 
understandings. Rather, if functions under the "rule of understandings". The Russian 
legal system was given a major overhaul in 1964, at a time when the then Soviet 
government did not acknowledge that ROC existed, commercial banks and firms did not 
exist either, and the Communist Party had complete control of the courts, law 
enforcement system and all lawyers. The fact that Russian President Yeltsin recently 
vetoed a second attempt to pass a toothless law on money laundering shows that this is 
not a priority for the Russian government and that current economic interests have the 
final word in economic policy, despite constant assurances to the US and EU to the 
contrary. Therefore, the argument is normally made "the theft of these funds was not 
illegal in Russia." According to this, it is obvious that hardly any economic crimes - by 
world standards - are illegal in Russia - and those few crimes that are recognized are 
negotiable. 

Secondly, the court system and law enforcement authorities are not independent and 
suffer from high levels of corruption. Until recently, some Russian newspj^)ers published 
the current rates of bribes for specific acts to help subscribers avoid overpaying. Perhaps 
the case of several Russian officials arrested in connection with the Solntsevo Mafiya 
illustrate best the institutionalization of official corruption. Colonel Yevgeniy Zhigarev, a 
Higher Police School professor, testified that bribes from the Solntsevo crime family 
were distributed as follows: the prison counselor passed orders and "treasury money" to 
friends in law enforcement; the investigator collected information on the pertinent 
criminal cases, devised a plan to derail them, and by deception obtained the materials for 
examination and falsification. The professor found middlemen to pass bribes to 
investigators and judges. There was a precise fee structure: for changing the measure to 
secure the appearance of the accused, for dismissing the case, for lessening the sentence. 
Freedom was charged at $25,000 per person. 

Another case illustrates the role of the Russian courts concerning a major US fast food 
firm which discovered its Russian partner was a member of ROC and was defrauding the 
US firm. After months of litigation, the US firm obtained a $ 1.2 million judgment by the 
International Arbitration Institute in Stockholm which was awarded to him in January 
1997. Subsequently, the city court in St. Petersburg granted an order of enforcement to 
this foreign arbitration award. This was said to be the first such enforcement order issued 
in post-Soviet Russia. This decision by the International Arbitration Institute in 
Stockholm was even confinned by the Russian Supreme Court in April 1998. However, 
despite of having a decision from the highest court in Russia, the US firm has not yet 
been able to enforce this decision and recover a dime because the Russian courts and law 
enforcement authorities have been thus far successful at ignoring the decision by the 
highest court in the country. 

Thirdly, a fact that has tfie most detrimental effect on US businesspersons is the absence 
of a US-Russian Investment treaty. Despite the fact that the Gore-Chernomyrdin 
Commission allegedly labored for years to encourage investment by US businesses and 
resolve legal issues, this bilateral treaty has never been passed. While it is admittedly 
difficult to persuade the Russian Duma to pass any laws, it is striking that the European 



310 



Union (EU) made the passage of a EU-Russian Investment Treaty for the protection of 
EU investors a requirement for large scale aid or any encouragement of EU investment. 
As a result, EU investors can sue for damages in European Arbitration Courts and get 
binding orders for restitution. By contrast, US investors are left with either using the 
totally ineffective Russian court system or they can hope that they included a clause in 
their contracts that allowed them to file suit in the international Arbitration Courts, such 
as in Stockholm or Paris. It is no exaggeration to say that new Russian Arbitration Court 
in Moscow is not very effective in protecting the interest of foreigners. 

Against this background, it is easy to demonstrate that tax evasion, money laimdering, to 
name a few, are not illegal in Russia. As a result, they can not be pursued by Western law 
enforcement officials. Therefore, Western bankers ever chasing after fat profits, see no 
reason to reject this lucrative business. On the other hand, let us look at the matter of tax 
evasion in Russia. The primary reason for the IMF loans over the last few years has been 
the shortage of taxes collected by the Russian government. Thus, every year the IMF 
needed to provide billions of dollars to make up for uncollected taxes. The tax funds that 
were diverted - ended up in the hands of criminals and corrupt officials. This means that 
Western and US taxpayers in particular, are footing the bill for tax funds that remained 
unpaid by Russian businessmen and a large number of Russian state enterprises. Sadly, 
this cycle shows no signs of slowing. It is also quite safe to assume that these IMF loans 
will never be repaid. 

I participated in a conference with the Russian desk officer and other Russia experts from 
the IMF in June of 1998, at which the IMF representative tried to vehemently convince 
the audience that $ 4.8 additional millions in IMF funds would surely turn the precarious 
economic situation aroimd in Russia, primarily because "the Russians were going to 
become far more effective in collecting taxes." The IMF key speaker and his peers 
conveniently ignored any warnings about the widespread top-to-bottom corruption in 
Russia and argued that the financial fiiture of Russia was bright. Only two months later, 
the economic crisis of August 1998 saw the devaluation of the Russian ruble and the near 
collapse of the entire economic system. Apparently, IMF predictions do not seem to be 
based upon facts that are readily available to even non-Russian experts. 

WHAT HAPPENED TO THE $ 4.8 BILLION IMF TRANSFER IN 
JULY-AUGUST 1998? 

Worse yet, there is the matter of what happened to the $ 4.8 million in additional IMF 
funds that were delivered to Russian accounts on July 23, 1998. Claims that there is no 
evidence of the theft of these funds are grossly misleading. 

First, as already mentioned, there are very few laws on the books in Russia regarding 
financial fraud, conflict of interest, bribery and official malfeasance. "Criminals" control 
the government and refiise to pass any meaningfiil set of criminal laws outlawing money 
laundering and punishing corruption. 



311 



Secondly, the Price Waterhouse audit of the Central Bank off-shore firm FIMACO, was 
based solely on the documents provided by the Russian Central Bank. That is the same 
bank that now admits that its GKO bonds (short time saving bonds) were "nothing but a 
pyramid scheme". It is also the same bank that originally lied about the funds passing 
through FIMACO. 

Third, the IMF has frequently admitted that they lacked the mechanisms to monitor their 
funds once they have been delivered to the Russian government, respectively the Central 
Bank. Thus, the IMF is correct in stating that they have no evidence of stolen or misused 
fund, if only because the Russians did not deliver them evidence to the contrary evidence 
on a platter. In addition, the diversion of funds to a select few probably does not even 
violate the almost non-existen Russian laws governing financial fi^ud. 

The world knows that the IMF delivered a payment of $ 4.8 billion to the Russian Central 
Bank on July 23, 1998. This was part of a $ 22.5 billion bailout package aimed at 
restoring confidence in the Russian. This has been a continuing IMF and US priority 
since the announcement of massive infusions of IMF capital just prior to Russian 
President Boris Yeltsin's re-election in 1996. What happened to these fbnds has been the 
subject of great debate. According to a variety of well informed sources in the US and 
Russia, it now appears that about $ 471 million or slightly less than 10 per cent of these 
funds were actually used to support the Russian ruble. Some 90 % or $ 4.4 billion of 
these $ 4.8 billion was deposited into a Russian Central Bank account on July 23, 1998. 
Between July 23 and August 17, 1998 (when the Russian ruble was devalued and Russian 
economy collapsed), $ 4.4 billion of these funds were sold from that account directly to 
Russian and foreign banks. This was extremely unusual in that it bypassed the trading 
session at the Moscow Interbank Currency Exchange (MICEX), which would have given 
all of the banks, trading houses and financial institutions an equal opportunity to purchase 
these funds. Only $ 471 million, or less than 10 per cent of these funds were used to 
support the ruble exchange rate on the MICEX. Another $ 100 million or less than 2 per 
cent went for intervention on other currency exchanges. 

The bulk of the IMF money was used by eighteen large Russian and foreign banks to 
convert their GKO's (bonds that were used as debt instruments) into dollars just days 
before the Russian government defaulted on them. These bonds had yielded as much as 
200 percent per armum in interest. Any educated investor would have taken this as 
indicator that the rate was unlikely to last over a long period of time and that only the 
extremely high risk of this investment tools could justify these unusually high yields. 
Several Western banks and investors lost amounts up to $ 2 billion dollars each when the 
Russian government defaulted. However, the 18 banks that did receive the IMF funds 
and could cash in their GKO's just days in advance of the Russian government's default 
included the largest and most powerful banks in Russia, also known as the "privileged" 
group because of their supporters in high places in the Russian government. More details 
on the make-up and background of these banks is contained later in this written 
testimony. 



312 



What my sources tell me as the most striking fact about these transactions is that the 
Russian Central Bank account in which the $ 4.8 billion in IMF funds were deposited and 
were distributed was their account in the Bank of New York. These funds were then 
allegedly distributed to correspondent accounts held by these 18 Russian and foreign 
banks within the Bank of New York . The Bank of New York then helped these 
"privileged" banks to transfer these funds out to other accounts. Only the most gullible 
would argue that these 18 banks did not receive special treatment and illegal advance 
warning of the upcoming default on the GKO's. 

The fact that the Russian Central Bank allegedly lef\ these $ 4.8 billion in the Bank of 
New York over at least 25 days means that the US bank made several million dollars in . 
Profits, not just on transfer fees, but also on "overnight interest". These accounts have 
now been further verified by the written statements and documents provided by Russian 
prosecutor Skiu-atov. (NOTE: He is still officially the prosecutor although Russian 
government guards will not allow him to enter his office since he accused President 
Yeltsin and his family of corruption). 

This provides the US Treasury and Justice Departments with the opportunity to prove or 
disprove these allegation regarding the "misuse" of these IMF funds. As these 
transactions took place in the Bank of New York, which is under US jurisdiction, a 
review of these accounts would seem to provide a list of the "privileged" Russian and 
foreign banks. This may even include US banks which could be further investigated as 
to their roles in this matter. If, once again, the US government fails to investigate this 
matter, it will be following the policy that it has established over the last seven years and 
which is encouraging and facilitating the continued growth of Organized Crime, looting 
of the Russian state and at the cost and to the detriment of the impoverished Russian 
people. 

THE ROOTS OF THE PROBLEM: 

Corruption in Russia is as old as recorded history. It was certainly a major cause of the 
unpopularity of the last Czars and contributed to the eventual revolution. Even worse, 
corruption did not disappear with the advent of the Communist system but became even 
more entrenched as the Communist Party expanded the bureaucratic system throughout 
the country to seek total control of the people, create official jobs for Party members and 
increase its patronage system. While Western, capitalist systems continued their tradition 
of inheriting land, personal property and money from elders to their relatives, the 
Communist system replaced land, personsil property and money with influence, 
coimections, and opportunities for Party membership that included perquisites. With the 
dissolution of the Communist Party as the only legitimate political structure in 1990 
these Soviet nomenklatura foresaw a threat to their previously privileged lifestyles. 

To support this lifestyle, a vast underground economy of ofT-the-book factories, food co- 
ops, and construction companies began to floiuish in the mid- 1 970' s, in collusion with 
party bosses. By the late 1980's, up to 40 percent of the nation's foodstufiis passed 
through the black market. By the end of the Brezhnev period, the underground sector of 



I 



313 



the economy accounted for as much as 50 percent of the personal income of Soviet 
workers. But the nomenklatura and black-marketeers profited the most: they lived like 
feudal lords in ornate hilltop sanatoriums and summer villas, shopped in special stores 
bulging with hard to get foreign made consumer goods, and traveled abroad - considered 
to be the most coveted privilege in the Soviet Union. 

Organized Crime in Russia is an "oligarchy" formed by the former officials of the Soviet 
state and the Russian Mafiya. What makes this group unique is not only the extent of 
their power, influence and wealth in Russia, its republics and increasingly internationally, 
but also that these are two distinctly different groups, operating sometimes 
independently, sometimes in common. The best estimate is that the criminal Russian 
Mafiya only makes up 10 to 15 percent of Russian Organized Crime, while the remaining 
85 to 90 percent are current or former officials of the Soviet party-state. These officials 
continue to manage the Russian government, its industrial complex, the new 
"commercial" banks, and most of the new businesses. However, they are still part of 
Organized Crime. The current definition at Interpol's Organized Crime unit is: "Any 
group having a corporate structure whose primary objective is to obtain money 
through illegal activities, often surviving on fear and corruption." That not only 
describes Russia's business, banking and industrial sector, it also describes and involves 
its government. 



Many Russian citizens feel that their country has been stolen fi-om them. The small group 
of men who have corruptly seized the assets of the state flaunt their wealth as 
thoughtlessly as any czar. These men are the Oligarchs. They have robbed the 
government of its administrative skeleton - the tax revenues to maintain state services 
and infi-astructure. The taxes fi-om natural resources - especially gold, minerals, 
diamonds, and timber - once provided 75 percent of state revenues under the Soviet 
system. Now these resources are controlled by the tycoons, and they use their political 
connections to pay no taxes, sending much of their illicit profits out of the country: More 
than $300 billion has gone this way, according to Interpol and the Russian Interior 
Ministry. 

Perfiaps the best example of the close pre- 1990 relationship between the various members 
of the oligarchy was given by retired police general Aleksandr Gurov,. "He noted that at 
the beginning of 1970's, in Georgia, a rayon party committee secretary would summon 
for a conference the UVD [Internal Affairs Administration] chief, the UKGB (KGB 
Administration) chief, and the local crime boss, and say: How could you permit such a 
rise in crime? Addressing this first and foremost to the crime boss, who would 
immediately start 'taking steps to reduce the crime rate' in this particular rayon. And this 
was happening not only in Georgia."' Gurov also stated that "I've estimated that 80 
percent of the chiefs of small criminal groups today are former deputy directors, former 
administrators of factories and enterprises."^ 

Plans for the looting of then Soviet State were first discussed in 1984 by specific sectors 
of the Soviet Politburo, the top officials of the Commimist govonment However, one 



314 



must keep in mind that this massive effort included many of the highest officials of the 
Soviet government, several elements of the KGB (now FSB), old and new bankers, 
industrialists and, of course, traditional criminals, such as the Russian Mafiya - which 
already had experience and significant personnel stationed throughout the West. Their 
primary goal was to ensure their financial and political status in the future, by taking 
control of the vast funds and resources of the Party and converting them into personal 
assets that could not be tracked or confiscated by future governments. 

By late 1986, the informal planning committee had been given the services of two KGB 
First Chief Directorate (FCD - foreign espionage) officers who were experienced in 
moving funds overseas both for the Party Central Committee, but also for other 
operational purposes. No written records existed of their meetings or proceedings, except 
for one copy to the Chairman of the KGB and one copy to the Central Committee official 
responsible for the Administrative Organs of the Politburo: Viktor Chebrikov. The 
Chairman of this planning group was CC Treasurer Nikolai Kruchina. This "planning 
group" determined that while the local KGB residencies via the diplomatic pouch system 
and simply smuggling suitcases of money over borders could be used initially, this 
temporary system could not be used in the long term due to the fi-equency and amounts of 
the funds that would need to be transferred, as well as the need to reduce the number of 
knowledgeable persons to an absolute minimum. Further, the existing system utilized the 
Soviet bureaucracy which required too many written records. Further, it was also 
decided that the overt ties to the KGB and other official agencies had to be minimized. 

THE STEPS IN LOOTING THE STATE: 

Therefore, the following plan was carried out to gradually build the enormous support 
structxire that would eventually be needed and then secure their wealth. (Some of these 
steps took place concurrently.): 

1 . Initially, smuggled "suitcases" of cash and the diplomatic pouch would be 
used to move limited amounts of funds to help sustain the initial firms that 
were to be founded and foreign accounts to be opened. In addition to cash, 
diamonds and gold, antiques and art objects such as icons, paintings and 
jewelry could also be smuggled. Some of the antiques and art objects were 
pilfered fi-om Russian state museums such fi-om the Heritage collection in St. 
Petersburg. However, great care had to be taken to avoid being detected by 
local revenue services as no plausible source for the funds could be given. 
(This occurred between 1986 - 1989.) 

2. In the second phase, Russian organizations such as Komsomol, state 
enterprises and factories were used to simply transfer large amounts of funds 
for national reasons to their related offices and finns in the Soviet republics 
and, where possible, to the West. These funds were to be used to found 
firms and banks with no obvious ties to the CPSU, thereby preparing for the 
next stages of this plan. In addition, funds were to be transferred to various 
cooperatives founded by "friends", which would not only ensure the 



315 



financial success of these firms but also allow to provide a basis for 
transferring more money in the future. As a result, most of the initial 
"private cooperatives" in the USSR which enjoyed success, were actually 
funded with oligarchy funds. (This occurred between 1986-1989.) 

3. Simultaneously, trading firms were founded to act as "intermediary" firms to 
sell Russian resources, such as oil, natural gas, non-ferrous metals, 
diamonds, chemicals and cotton. These firms received these materials at 
state subsidized "internal prices" and sold them at world market prices. For 
example, at one time, the worid market prices of oil was almost ten times 
that of the "internal" price. Profits fi-om these operations were deposited in 
tax havens such as Switzerland, Cyprus, the Caribbean, Panama, Hong 
Kong, Ireland and the British Channel Islands, where they would be ready to 
assist in forming future "non-attributable" companies as well as being 
available to be used as "Western investment" in Russia and the republics 
under the cover of being "Western Joint Ventures". It was during this period 
that Russian Premier Boris Putin allegedly left the KGB and became 
responsible for the issue of permits for the export of non-ferrous metals and 
other resources under the corrupt administration of former St. Petersburg 
Mayor Anatoliy Sobchak. (This was typical for the period between 1989- 
1991.) 

4. In the fourth phase, fi-om 1989-1992, larger firms and banks could be 
founded in Russia and the former republics, as well as in the West. When 
possible, the off-shore accounts which had been previously established were 
to be used to discreetly purchase controlling interests in existing banks and 
firms with good reputations. Wherever possible, "fiiends of the party", who 
were not overtly knowTi to be connected to the Party, were used as the 
ostensible "investors". In the case of the Russian banks to be acquired under 
this system, they were given exclusive licenses for trading in precious metals 
as well as foreign currency exchange. 

5. In the fifth stage, from 1989 -1991, "shell" corporations were founded in 
Western countries such as Germany and Britain, as well as Ireland and 
Switzerland, and the United States (especially in Delaware and California). 
These firms then assumed loans from off-shore banks (from fimds previously 
raised under this program), which were used to "invest" in Russia. This 
system was frequently used to form "Joint Ventures" with "Westem firms", 
that purchased key properties, factories and banks. This allowed these 
"investments" to be protected by the laws of the Westem countries in which 
the "paper" firms were located, as well as by international law. Therefore, in 
order to provide additional protection, the "paper" firms were primarily 
founded in countries which provided aid and assistance to any future Russian 
governments; and, therefore, could not be provoked by attempts to seize 
these "investments". Noted below is the text of a top secret decree of August 
23, 1990 under the administration of Mikhail Gorbachev that called for the 
creation of "an invisible economic structure" to conceal Soviet state funds 



316 



and wealth. Therefore, it is interesting to note that the Russian Central Bank 
formed the off-shore structure FIMACO in 1990 - allegedly to hide Russian 
government funds from possible attempts by Westerners to attach these 
funds to unnamed defaults. Although it is estimated that over $ 50 biUion 
passed through this one firm, no one can say where even the interest from 
these funds (circa $ 5 billion at a minimum) went. The auditing fmn 
PriceWaterhouse, the auditing firm, relied in its examination of FIMACO 
solely on records provided by the Russian Central Bank and not on 
independent research. Similar decrees were issued by the KGB and GRU in 
1989 and 1990. Shortly thereafter, the current Russian Premier Boris Putin 
allegedly left the KGB, then working at a position that controlled permits for 
oil shipments out of Russia. The Russian press and some law enforcement 
officials note that he developed ties to ROC during that time and was 
investigated - unsuccessfully - for official corruption. 

6. In the sixth stage, from 1994 to the present, the criminal structure became 
highly developed and was capable of creating new income by using its 
contacts in Russia and selected republics for "profitable investments", such 
as purchasing materials and natural resources at rock bottom discount prices 
(or receiving more material than was shown on the shipping documents and 
contracts), as well as from legitimate investments in the West. Some of these 
enteiprises were used to make large investments in Russia and its former 
republics, which by then looked like "legitimate" foreign investments to 
outsiders. Therefore, the purchase or controlling interest of existing Western 
banks and firms with good reputations became an absolute priority. 

There is one consistent thread throughout these steps in looting the state. The goal was to 
take the money outside of Russia and keep it there, safe from any threats of retrieval 
attempts by subsequent Russian governments. The Western banking system has provided 
the network with which to move these funds. From my research, less than 5 % of these 
funds have returned to Russia for investment. Those funds that have been reinvested, are 
usually masked by "paper" firms in Western countries. Many Delaware firms that are 
listed as US investors in Russia and the former republics are simply Russian citizens or 
emigres that purchase a low cost US firm, take a mythical "loan" from a Caribbean 
island account which they actually own but which never comes on-shore to the US where 
it would be subject to scrutiny by the IRS or Treasury Department; and then becomes US 
investment in the FSU. The US government is then obligated to protect these 
investments and, of course, these "paper" firms make frequently political donations to US 
politicians and political parties to obtain influence. The Russians who move their money 
out of Russia recognize that it is an unsafe place to keep their money. They keep it in the 
West. They much prefer to use the money of US investors to take the risks in Russia and 
in some cases, to provide additional attempts at fi^ud. 

WHERE THE KGB AND AND THE GOVERNMENT FIT IN: 



317 



In October 1990, several KGB First Directorate (Foreign Intelligence collection ) workers 
were shifted to work in the Party Central Committee Property Directorate, so that a 
structure that was capable of coordinating the Party's economic activities could be 
established. The basis for this new group was an agreement between deputy General 
Secretary of the Central Committee, Vladimir Ivashko; the Central Committee Treasurer 
Nikolai Kruchina; KGB chairman Vladimir Kryuchkov; and, KGB deputy director Filipp 
Bobkov. ■* Bobkov later became the chief of Security for MOST Bank. Also in October 
of 1990, Bobkov sent a directive to selected overseas KGB residencies stating that they 
should immediately begin to submit proposals for the creation of covert KGB commercial 
firms and financial establishments. (This is approximately the time when Russian Prime 
Minister boris Putin "left" the KGB and began to play a role in helping to loot Russia.) In 
addition, the KGB office chiefs were to propose trusted "friends" with a clandestine 
relationship to the KGB who would be able to either found such enterprises on behalf of 
the KGB or allow KGB officers to enter their firms to oversee the management of ftinds 
or low cost raw materials that the KGB would provide. This latter list was to include 
even consideration of the "illegals" network. * KGB and Party money, more precisely 
oligarchy money, which made up almost 80 % of the amount invested in the new banks, 
stock exchanges, and businesses in 1990-1991. * 

"Staff fi-om foreign intelligence (KGB First Chief Directorate - FCD) became the 
creators and developers of commercial frameworks for the illegal economics of the 
CPSU. Colonel L. Veselovsky, of the PGU staff, was called in November 1990 from 
abroad. He was a specialist in international economics and was transferred to the work 
on management of the Central Committee of the CPSU. Veselovsky prepared documents 
for the small enterprise "Galactic" and other firms, where almost one billion rubles 

belonging to the Party had been transferred L. Veselovsky accounted meticulously 

for his activities to the leadership of the KGB. Consequently, the archives of the KGB 
are fijll of detailed accounts of the creation of commercial structures and their managers. 

The firing of Veselovsky two weeks before the August putsch is especially 

noteworthy. Veselovsky immediately left for Switzerland, where he found himself a job 
as consultant in four foreign firms."^ Prior to his departure, Veselovsky is reported to 
have given a briefing of his planning and organizational work to four members of the 
Russian Politburo - one of whom is reputed to be Yevgeny Primakov. 

Yevgeny Primakov was then installed as chief of the FCD on September 30, 1991 and 
then made chief of the SVR the successor to the FCD, in December 1991, where he 
remained until January 1996. The FCD and then the SVR remained active in moving 
Russian funds and resources out of Russia during most of this period. Therefore, it is 
clear that Primakov had direct knowledge of these activities. At that time, Russia's 
wealth ah-eady was vanishing into a black hole. Eight metric tons of platinum, 60 metric 
tons of gold, hoards of diamonds and an estimated $15 billion to $50 billion in cash were, 
according to reformist lawmakers probing KGB crimes, only a small part of state 
property stolen under secret Commimist Party Central Committee decrees and transferred 
to unknown hands by the KGB's espionage branch between 1989 and 1991. Primakov 
held the keys to their recovery. However, when the Duma Ponomarev investigative 



318 



cominission repeatedly asked for information on these funds and where they had been 
moved, it was also Primakov who refused access to the FCD and SVR records. 
When the Russian investigators focused on the son of a former Soviet premier who 
worked at a Luxembourg bank, as well as the son of disgraced former KGB chairman 
Vladimir Kryuchkov who was KGB "rezident" in Switzerland, Primakov acted quickly. 
He blocked the investigation and persuaded Supreme Soviet Chairman Ruslan 
Khasbulatov to disband the Ponomarev commission. Untainted personally by corruption, 
Primakov decisively sabotaged the only serious attempt to undo the massive thefl that 
depleted Russia's treasury and strengthened its kleptocratic oligarchy.Therefore, as this 
information was widely known from public sources, it is noteworthy that the current US 
Administration took Primakov seriously during meetings of the Gore-Chemomierdin 
Corrmiission or when Primakov asked for US Government assistance in looking for the 
fijnds that had been looted from Russia. In his favor, he did refuse to support Yeltsin's 
attempts to subvert the Russian prosecutor and was forced to resign for putting Russian's 
interests above Yeltsin's. 

On 5 January 1991, the KGB Third Directorate ^ in Moscow sent Top Secret Message 
174033 to military bases throughout the USSR, which was a classified directive from 
KGB chairman Vladimir Kryuchkov that called for the creation of private commercial 
firms to sell military technology overseas. In it, Kryuchkov, cited the "deteriorating 
domestic political situation and called for the creation of more apparently private, 
commercial firms. Kryuchkov stated that this program had three strategic aims: 1) the 
new companies were to serve as "reliable covers for (KGB) leaders and the most valuable 
(KGB) operatives, in case the domestic .... situation develops along East German lines; 
2) to provide financial means for the organization of underground work if 'destructive 
elements' come to power; and, 3) to create conditions for the effective use of foreign and 
domestic agent networks during (a period of) increased political stability.' The fact that 
this message called for the raising of funds for political opposition clearly shows that 
Kryuchkov was not optimistic about the chances of Gorbachev's success in maintaining 
the Party system and that the KGB was already taking serious steps to prepare for the 
future in terms of ensuring protected sources of funding. 

On June 11, 1991, Gorbachev signed another secret Politburo resolution which 
authorized the transfer of six hundred million rubles to commercial organizations and 
banks established by Party bodies such as the Komsomol. The resolution directed that 
these funds were to be used to invest in the creation of "modem forms of economic 
activity, such as shareholding companies and small enterprises as well as to be made 
available to "rehable" foreigners willing to establish joint ventures with Party 
enterprises.' Evidence presented in a 1992 trial concerning the harming of the 
Communist Party indicated that Gorbachev had signed another such Politburo resolution 
in 1991 directing that Party property throughout the USSR should be transferred to 
reliable "private" owners.'" In the jargon of the Communist party, this normally meant 
that these would be members of the nomenklatura or their families. 

CORRUPTION IN ROC: IT IS PUBLICLY KNOWN 



319 



I 



As can be seen, there has long been a great deal of evidence of extreme corruption and 
criminal activity at the highest levels of the Russian government - the same leaders that 
we have unquestioningly supported and not forced to adapt meaningful reforms. To 
reinforce this point, let me provide one more significant illustration. On June 27, 1994, 
then CIA Director R. James Woolsey presented testimony before a House Committee that 
included a statement that detailed the size, nature and dangers presented by ROC. 
Woolsey noted that "Of the 2,000 banks in Russia today, a majority are controlled by 
Organized Crime , according to the Ministry of Internal Affairs. The Ministry says there 
are roughly 5,700 Organized Crime groups in Russia , with an additional 1,000 in the 

other former republics According to a 1994 report prepared for Boris Yeltsin by the 

Analytical Center for Social and Economic Policies, 75 percent of Russia's private 
enterprises pay 10 percent to 20 percent of what they earn to criminal organizations. 
More recent estimates from 1996 and 1997 are 20 to 30 percent of the profits must now 

be paid to the Mafiya - with these costs being passed on to the consumers Some 

40,000 state and privately run companies, including most of the country's banks, are 
controlled by 150 criminal syndicates.'^ 

Corruption among the police is rampant. Frequently, in Russia as well as former 
republics like Latvia, victims of car theft are referred by the police to Organized Crime 
groups who often will agree to return the vehicles in exchange for paying half its original 
purchase price. The police often offer to help the victims to contact the Mafiya. This kind 
of maneuver has become standard procedure, confirm other Russians." Retired Russian 
police general Aleksandr Gurov noted what many Russians confide in private, in that the 
Russian Mafiya now acts in place of several state agencies, such as the police, court 
systems, etc., and it is to the Mafiya that many businessmen are forced to turn to obtain 
payment on contracts, received paid for goods, etc. 

FBI Director Louis Freeh stated before the US Congress that over 200 of Russia's 6,000- 
odd crime gangs operate with American counterparts in 17 U.S. cities in 14 states. 
According to intelligence reports, members of criminal groups in Russia are sent to 
reinforce and consolidate links between groups in Russia and the United States. Russian 
Organized Crime figures are also sent to this country to perform a service such as a 
gangland murder or extortion. 

The Moscow Criminal Police reported as early as June 1991 that one third of the criminal 
groups in Russia were connected to the shadow" or second economy. 

In April 1994, the Mafiya was estimated to have 55 percent of the financial capital and 80 
percent of the privatization shares and vouchers in Russia. As a result, they were able to 
control the privatization process, arrange wanning bids very much below market prices 
and arrange the outcome of the bidding in at least 70 percent of the privatization 
auctions. 

In April 1996, a senior officer of the Federal Tax Police Service was arrested for 
accepting a US $ 200,000 bribe fi^om one single commercial company. This was one of 
the few such cases ever prosecuted.'^ 



320 



In 1996, the Russian Newspaper Trud reported that the number of reported murders in 
Russia rose from 15,500 in 1990 to 32,000 in 1995, adding that many of these murders 
are the result of disputes over the division of the spoils of the market economy. Related 
to these disputes, there were a reported 500 "contract" killings in 1995 of which 61 
assailants were arrested. Although 73 percent of the reported murders in Russia are 
solved, only 40 percent are solved in Moscow.'* 

In September 1 996, Komsomolskaya pravda reported that regional political leaders use 
Mafiya groups in inter-ethnic disputes in order to maintain their political power. The 
article pointed out that many small businesses were also being set up by the Mafiya and 
that over 300 city officials in Moscow belonged to criminal groups. In addition, the 
estimated Mafiya turnover in Odessa is equal to the city's official budget. "^° 

In a recent television interview, the Chief of the paramilitary Russian Ministry of Interior 
special reaction unit stated that he believed that at least 50% of the raids that his unit 
makes are a result of payments (bribes) to his superiors by businessmen who want to 
harass their competition. 

How then can any senior US official then say that they don't know or have any concerns 
about ROC? 

Tax-evasion is another major problem, about which Russian law is very vague. The first 
national survey showed that in 1992, up to 40% of businesses did not pay taxes at all. By 
very modest estimates, and bearing in mind that all figures are approximate, this 
amounted to a loss of at least $2 billion (US) in government income. This figure does not 
include spectacular profits made by various "entrepreneurs" fitjra the sale of western 
hiunanitarian aid delivered to Russia during the winter of 1991-92. According to reports, 
up to 60% was resold at free market prices. Again, the money was laundered through the 
banks, loans were issued and, by conservative estimates, an estimated $15 billion (US) 
was transferred abroad in 1991-92. The fact that Russian law enforcement activities are 
rather uneven has a variety of causes. However, it is particularly noteworthy that even 
some of the most effective Russian police organizations are somewhat "tainted". For 
example, at the meeting in which Major General Vladimir Rushaylo, former chief of the 
regional Organized Crime Administration (RUOP) and later deputy Chief of the Main 
Administration on Organized Crime of the MVD suddenly resigned in October 1996, he 
stated that "the resources allocated from the budget are negligible, but for several years, it 
(RUOP) found sponsors among commercial structures."^ (NOTE: Major General 
Vladimir Rushaylo returned as deputy Minister of Interior and was recently made 
Minister of Interior. He is frequently accused of being the official responsible for 
suppressing key information concerning alleged ROC kingpin Sergei Mikhailov during 
his trial by the Swiss authorities.) As it is commonly accepted that at least 80 % of the 
commercial structures pay protection to the Mafiya - at a minimum - it is interesting that 
commercial structures - which RUOP was supposed to control and investigate - wctc 
providing the budgetary means for this law enforcement group. 



321 



"According to the information from (Russian) law enforcement agencies, up to 70 % of 
the real estate put up for auction ends up in the hands of persons selected in advance... 
According to information received from sources in the Ministry of Internal Affairs 
(MVD)and in entrepreneurial circles, a gradual merging of three social groups is taking 
place in Russia at levels from the Rayon to the Oblast level, and they are laying their 
hands on various levers of power. This applies to the bureaucracy, above all, which has 
the experience of managerial work in the former system and which has united with the 
'new people' who soared to the ruling heights in the late 1980's and early 1990's on the 
wave of the anti-Communist movement. It also applies to people in legal and shady 
business activity, who are closely linked to the third group - the criminal world.... In the 
opinion of the staff of the Russian MVD Department for Combating Economic Crime, a 
tendency has already become apparent to move away from individual, albeit very 
frequent, cases of bribing representatives of the power elite to that of close and regular 
cooperation among the apparatus elite, businessmen and criminal forces connected wdth 
them. The 33 % of all embezzled funds which was used to bribe 'State officials' in the 
1980's has now increased to more than 50 %. Among those against whom proceedings 
have been initiated for corruption, 42.2 % are employees of ministries, State committees, 
and regional management organs. More than 50 % of all capital and 80 % of voting 
shares (in commercial enterprises) now go to criminal structures." 



ARE RUSSIAN BANKS THE ONLY THREAT? 

Russian banks and firms are not the only ones that need a special level of scrutiny. 
Latvia, a former Russian republic, is now allegedly on the "fast track" to becoming a 
member of the European Union and NATO. Riga, Latvia was the scene in June 1999 of 
Ms. Lucy Edwards presentation on how to avoid difficulties with US money laundering 
laws on behalf of the Bank of New York. However, take a close look at Latvia and you 
will see that its banks and firms also deserve special attention. 

Of interest to Russia for several centuries due to its ice free ports on the Baltic Sea, 
almost 48 % of Latvia's ethnic population stem from Russian ethnic origins. Lacking 
any natural resources, in the USSR, it was primarily a transit site with a few 
manufacturing industries tied to Russian raw materials. Since independence in 1991, the 
two main industries are acting as a "intermediate" off-shore banking center for Russia 
and facilitating the transit of Russian oil to the West, In June of 1997, the Russian 
press reported that ''almost all Latvian banks are mediators in transferring Russia's 
money abroad" and that ''a special committee, headed by PM Viktor 
Chernomyrdin, had been formed to stop the illegal flow of Russia's money via 

Latvian banks The average monthly turnover of such operations in one bank 

reaches 10-15 million dollars.' Internet sites on the infamous island of Nauru now 
advertise Latvia as an off-shore banking center. At the same time, the United Nations 
report on hiraian development listed Latvia as 93"* in the world, between Ecuador and 
Iran, and much lower than Estonia, Lithuania and Russia. ^^ 



322 



In late 1996, the European Union issued a report stating that there was large scale 
corruption at all levels in Latvia, particularly in the Ministry of Interior for the taking of 
bribes. ^' The report added that "In the opinion of European Union experts, one-third of 
the turnover of goods and services in Latvia is controlled by criminal groups, and 50 
percent of the profits obtained by criminal means goes towards bribing officials." The 
report went on that "Specific facts on the presence of corruption in the country were 
presented to the Latvian authorities by the European Union commission which had 
conducted an independent investigation. EU experts came to the unanimous conclusion 
that corruption exists in all branches of Latvian power. In their opinion, the transition to a 
fi-ee market economy in Latvia led to its criminalization. Organized criminal groups 
participate in every lawful and unlawfiil deal. In 1993, they controlled one-third of the 
turnover of goods and services. The commission expressed the supposition that 
approximately 50 percent of the profits obtained fi-om criminal activity go towards 
bribing officials. An especially critical situation has been formulated in the activity of the 
customs service, the state income service, and Minfin [Ministry of Finance], which are 
influenced by government officials of all ranks who have no official powers and authority 
to do so. For example, the investigative agencies of the customs service do not have 
access to customs warehouses belonging to high-level individuals. Customs officials are 
bribed, and the most stubborn ones are dismissed fi-om work. In order to get an 
assignment as a customs officer at a profitable border station, one must give a bribe in the 
amount of $5,000. For duty-fi-ee passage of large shipments of goods across the border, 
one must pay no less than $7,000. Analyzing the situation with organized crime in Latvia, 
the EU experts came to the conclusion that all of it is tied with Russia. But most of all, 
they were amazed by the fact that even businesses in which only citizens of Latvia may 
engage according to Latvian laws, for example pharmacology and detective activity, were 
associated with Russian criminals. Seemingly in confirmation of the commission's 
conclusions, the German journal Impulse published a rating of corruption in the countries 
of Eastern Europe. According to its estimates, in Latvia, for example, businessmen are 
forced to resort to the aid of bribes for promoting their businesses more than in the 
neighboring Estonia and Lithuania. Although, the journal admits, Latvia is still a far cry 
fi-om Russia. There the envelopes are thicker, and there are more addressees."^' 

During the period of the Post-Communist oligarchy, selling low priced non-ferrous 
metals (among other things) to the West for high profits, Latvia became one of the major 
exporters of non-ferrous metals in the world - even though it has no such metal resources 
of its own. The deputy head of the Russian Ministry of Interior organized crime division, 
Boris Baturin, stated in July 1992 that "Our operative information indicates that the 
smuggling of raw materials (fi-om the Baltics) is being reinforced at the highest level in 
Moscow. We know there is a well-organized Baltic crime syndicate run by former Party 
nomenklatura and former KGB and police officials, which uses its connections inside the 
Russian leadership to monopolize export operations".^* In January 1997, Latvian Prime 
Minister Skele resigned for a short time because the Parliament did not want to accept his 
proposed Minister of Finance due to concerns about corruption and conflict of interest 
The proposed Minister was eventually accepted. In May 1997, Prime Minister Skele 
threatened to resign again if the Parliament continued to leak allegations of his 
involvement in the disappearance of G-24 funds, stated that "it is not acceptable that any 



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doubt is cast upon the premier's office".'" In 1997, one third of the Latvian Parhament, 
the majority of the Cabinet and the President of the country were found to be openly 
violating the new government regulations on anti-corruption passed in the Fall of 1996. 
When confronted on this issue, many simply refused to comply. However, when their 
cases were reviewed by the Prosecutor's office, most cases were found to be only 
"technical" violations.' ' 

According to the former Minister of Interior until 1996, Janis Adamsons, "the authorities, 
including the parliamentarians and the government, are so criminalized that the 
personality of not only a minister but even the head of government has no significance 
under these conditions." Adamsons lost his position after only one year, primarily due to 
a controversy over the Ministry's investigations concerning Latvian Prime Minister 
Andris Skele, on whom Adamsons' department had accumulated dozens of volumes of 
operative information. These files dealt with the privatization of the food processing 
sector, to which Skele, as the former deputy minister of agriculture, had direct relations, 
as well as with the expenditure of $55 million in foreign credits which were distributed 
by a private firm created under that very same Ministry of Agriculture. On the eve of 
Skele's confirmation to the office of prime minister, Adamsons spoke out in the 
Parliament voicing his doubts regarding the proposed candidacy. The investigation 
materials of the Interior Ministry were then handed over to the State Prosecutor. 
Adamsons received a reply several months later, after Andris Skele had already assumed 
the office of prime minister, while Adamsons himself had vacated his. In a letter to the 
ex-minister, the State Prosecutor stated: "Considering the fact that your report was based 
on suppositions, the information mentioned in it is not the truth." The materials of the 
operative investigation were buried.'^ 

In January 1997, Skele himself was forced to temporarily resign because of a scandal 
surrounding the dubious reputation of his proposed minister of finance, Vasiliy Melnik. 
The press attributed involvement in the trading of contraband alcohol to Melnik, as well 
as participation in unlawful privatization. Once again, the State Prosecutor did not find 
anything punishable in the businessman's actions, but the government fell nevertheless, 
"...on the eve of the prime minister's resignation, the coimtry's President, Guntis 
Ulmanis, admitted that he surmised that corruption does exist, but that, imfortunately, he 
does not have any specific facts. Ten days later, after personal reproaches of Andris Skele 
for amorality and lack of principle, in the course of compilation of the government, the 
President assigned the task of formulating the new cabinet to.. .that very same Skele."'' 

ATTEMPTS TO MINIMIZE THE RUSSIAN PROBLEM: 

Most people tend to view problems in tenns of their own experience and history, which 
often promotes false comparisons. These are two common fallacious arguments. 

Image: Russia today is just like Al Capone's reign of tenor in Chicago during the late 
1920*8 and early 1930*8. 



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Fact: For the US to be like Russia is today, it would be necessary to have massive 
corruption by the majority of the members at Congress as well as by the 
Departments of Justice and Treasury, and agents of the FBI, CIA, DIA, IRS, 
Marshal Service, Border Patrol, state and local police officers, the Federal 
Reserve Bank, Supreme Court justices, U.S. District court judges, support of the 
varied Organized Crime families, the leadership of the Fortune 500 companies, 
at least half of the banks in the US, and the New York Stock Exchange. This 
cabal would then have to seize the gold at Fort Knox and the federal assets 
deposited in the entire banking system. It would have to take control of the key 
industries such as oil, natural gas, mining, precious and semi-precious metals, 
forestry, cotton, construction, insurance, and banking industries - and then claim 
these items to be their private property. The legal system would have to nullify 
most of the key provisions against corruption, conflict of interest, criminal 
conspiracy, money laundering, economic fraud and weaken tax evasion laws. 
This unholy alliance would then have to spend about 50 % of its billions in 
profits to bribe officials that remained in government and be the primary 
supporters of all of the political candidates.''^ Then, most of the stolen funds, 
excess profits and bribes would have to be sent to off-shore banks for 
safekeeping. Finally, while claiming that the country was literally bankrupt and 
needed vast infusions of foreign aid to survive, this conspiratorial group would 
invest billions in spreading illegal activities to developed foreign countries 
which provided them with foreign. In the best case of this comparison, the U.S. 
President would not only be aware of all of these activities but would also 
support them - including the involvement of his own daughters and all of his 
close political and financial supporters. Further, he would direct a campaign to 
smear and remove the Attorney General for investigating the office of the 
PresidentObviously, this scenario dwarfs what went on in Chicago during 
Prohibition. Far from assisting the mobsters, the federal govenmient fought Al 
Capone, ultimately sending him to prison for income tax evasion. 

Image: Conventional wisdom holds that corruption and the power of Organized Crime 
will diminish as capitalism and free enterprise improve economic conditions, 
and democratic reforms will gradually reshj^e the government and 
infrastructure of Russia, causing criminal enterprises to spontaneously 
"legitimize" their operations. 

Fact: This view is totally misplaced. The expected improvements in the economy, 
infrastructure and government of Russia may well not take place for the next 
five to ten years and will not occur at a pace required to overcome the corruption 
and criminality now rampant. First, as much of the money flowing into Russia 
due to criminal activity and foreign aid is sent to off-shore banks for